In previous posts I’ve explained what the first two steps to financial freedom are (Financial Protection & Financial Security) and how much does it cost to achieve each. In this next post we will review what Financial Independence means and what is the target amount of money we need to have to be truly financially free.
You will have achieved financial independence when, through your various investments, you’ve accumulated a critical mass of capital that when invested in a secure environment at a 8% rate of return, provides you with enough cash to meet each of the 6 goals of financial security previously mentioned i.e.
- Mortgage repayments on your private home until it’s paid off e.g. $1,500/month
- Family food needs e.g. $500/month
- Utilities, gas and electricity e.g. $250/month
- Transportation needs e.g. $250/month
- Insurance – health, disability, house e.g. $300/month
- Taxes – such as property taxes e.g. $200/month
PLUS the following 3 additional financial goals:
- Provision for your children’s education (substantially or completely) e.g. $100,000 until their 18 and then say £50,000 for 3 or 4 years in college/university = $150,000 or an average of c. $7,000/annum over 21 years.
- Provision for basic entertainment needs – concerts, dinner out etc (at least 50% of what you enjoy now e.g. $300/month, $3, 600/annum
- Provision for the purchase of new clothing, or 1 or 2 reasonable “luxury” items such as plasma screen TV, car etc. e.g. $5,000/annum
When you sum up these 3 provisions it comes to $15,600/annum. Adding the cost of $36,000 per annum then the cost of financial vitality would come to $51,600/annum. Again, using an annual 8% return on investment would mean you’d need a critical mass of capital amounting to $645,000 in order to secure financial independence.
Financial independence is simply what it costs for you to live reasonably comfortably assuming complete autonomy from work/earned income. In one sense, all you’re trying to do is have enough of a capital sum invested to replace your current salary.
Now, if you will want to really nail the annual cost of financial independence, adjust upwards at an average inflation rate of say 3.5% each year and you’ll know exactly what true financial independence will cost you each year into the future.
Finally, if you’re saving or investing a substantial amount of your current income, then the amount of money you need to duplicate your actual current lifestyle is reduced by the same amount. So, if you’re saving 20% of your salary (say $10,000) than the new number you would need to be financially free would be $51,600-$10,000 = $41, 600
So, there you have it. We’ve defined exactly what Financial Protection, Financial Security and Financial Independence is in terms of a sum of capital required to generate adequate non-earned income. Put your own numbers into the above process to arrive at the exact dollar amount you require to satisfy your own living expenses/lifestyle requirements. Next time someone tells you they want to be financially secure or financially free, now you can say: “Really, cool, I can show you how much capital you’ll need to achieve that!
About Keelan Cunningham
Keelan Cunningham is an entrepreneur, multiple business owner, author, and personal finance/wealth building specialist. Keelan’s passion is helping people improve their business acumen and personal wealth creation strategies, so they can lead a truly wealthy life in all aspects and with any luck similarly transform the lives of others.
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