So how do we calculate your Financial Independence Figure? Written as a formula it is:
Investment Income > Personal Financial Needs
Investment income is the money you receive from investment assets like real estate, stocks, and bonds (refer to articles on Passive Income). When your investment income exceeds your personal financial needs, you no longer need to trade hours for dollars in order to survive financially.
When you reach your financial independence figure, you break the cycle of working for money, you will no longer need a job and can leave the rat race.
In real life, this financial independence figure means you could survive at a certain level only using the income from your investment. For example, your income from rental properties can cover your personal overhead. With more traditional investments like stocks and bonds, the 4% allows you to live off of 4% of your total holdings each year for a long period of time.
But before you begin hustling to accumulate wealth and income, let’s look at how to actually calculate your own financial independence figure.
How Much Does your Ideal Life Cost? The formula for financial independence may be simple. But actually squeezing all of your financial hopes, dreams, and insecurities into a math formula is challenging and a process you’ll continually need to update throughout your life. Your financial independence figure does not have to be perfect to be useful. Like any other goal, you can benefit from moving towards a goal even if the goal is just a reasonable guess.
So, how do make an educated guess for your financial independence figure? How do you figure out the cost of your ideal life? Begin by calculating your current expenses (refer to articles on Budgeting). Once you have an estimate of what you currently spend over a 1 year period, you can make a guess for the future. Many people find that their personal expenses will actually go down after retirement. If you pay off your home mortgage before retirement, that obviously reduces one major expense.
Life After Financial Independence: Reaching your financial independence figure does not mean that you can’t still work and make more money. It does not mean you will stop growing financially for the rest of your life. It does not mean you are perfectly safe and secure forever.
Achieving the goal simply means that the pressure is off. Your assets can support you instead of your job. This is an incredible place to be. An entire universe of life possibilities opens up. The same job that you once hated could be transformed when you know that you’re there by choice.
Creativity and energy that had been dormant for years will suddenly reemerge. New opportunities, new businesses, new questions, and new exciting paths will open themselves to you. And even more amazing, these benefits don’t just emerge once you’ve crossed the finish line. Whether you’re at the peak or still climbing to the summit, the thought of financial independence can still be exhilarating.
So, whatever an ideal life means for you, once you figure out your financial independence figure, it will provide a clear, focused goal that will help you win with money.