According to the Consumer Financial Protection Bureau, financial freedom and well-being can further be defined through these four elements:
Having control over your day-to-day, and month-to-month financesHaving the ability to absorb financial shockBeing on track to meet your financial goalsMaking the choices that enable you to best enjoy life.
Suppose you need to incur and save $72,000 a year to fund your dream lifestyle of living in a city and traveling around the world part-time. You currently have $1.8 million in investments and retirement savings. Many financial advisors say it’s best not to exceed a 4% withdrawal rate of your retirement savings during the first year of retirement if you want your money to last a lifetime. Plus, it’s best to adjust the amount annually for inflation. Using the 4% withdrawal rate rule, your portfolio is already generating the $72,000 you need to fund your lifestyle ($1.8 million x.04 = $72,000). Therefore, you’ve reached financial freedom.
How Does Financial Freedom Work?
The process of working toward financial freedom can be broken down into a few key steps.
How Much Money Do I Need to Reach Financial Freedom?
As mentioned, there is no one amount of money that every person should reach for in order to achieve financial freedom. The amount will vary depending on the individual and their lifestyle goals. Generally, though, the amount of money you need to reach financial freedom depends on your expected annual expenses, as well as your annual income. The multiply-by-25 rule is a helpful guide individuals use to calculate how much they should save for retirement, and it can be applied to financial freedom, as well:
Financial freedom (quantity) = expected annual income x 25
Let’s say you need to have $50,000 a year to afford your dream lifestyle. In this case, your financial freedom amount would be $1.25 million ($50,000 x 25 = $1.25 million). Ideally, though, in addition to saving regularly from your salary, you would increase the amount of money you save through things like 401(k) employer matches, compound interest on investments, and other sources of passive income.
