Rosalind Evans
One fundamental question often looms in the journey toward retirement: what amount of money equates to “financial security” or “financial freedom”? This number remains elusive for many, a distant figure shrouded in uncertainty. Yet, understanding this financial freedom number is crucial for effective planning. As Peter Drucker aptly said, “You can’t improve what you don’t measure.” This principle holds for our finances as much as any other aspect of life.
The quest for financial freedom is more than just an academic exercise; it’s necessary for those who cannot rely solely on their job, business, or government welfare for a stable retirement. It involves setting a numeric target for your financial goals and embarking on a journey to secure it, influenced by your economic aspirations, lifestyle, and investment choices.
The strategy for achieving financial freedom is straightforward yet profound. It comprises 80% soft skills, such as mindset, and 20% technical skills, including money management, investing, and entrepreneurship. This strategy anchors on two pillars: active and passive income streams.
Active Income Streams:
Your primary job or business is the first income stream. It’s not the amount you earn but your “saving-investing ratio”—how much you consistently set aside and invest—that matters. This approach transcends mere savings, considering factors like inflation and future financial needs.
Passive Income Streams:
Warren Buffett’s wisdom, “If you don’t find a way to make money while you sleep, you will work until you die,” underscores the importance of developing passive income streams. These investments work for you, freeing you from the need to earn actively.
Investing is crucial in this equation. It’s about growing your assets to a point where the returns can sustain your lifestyle, a concept that Tony Robbins highlights in his book, “Money, Master the Game.” He defines financial security as having essential costs like home mortgage, utilities, and food covered for life without the need to work. Economic freedom, on the other hand, is reached when your investment income can fully support your current lifestyle.
Calculating Your Financial Freedom Number:
There are several methods to calculate this number, with the famous 4% rule from the Trinity Study. This rule suggests multiplying your annual expenditures by 25 to find your financial freedom number. Alternatively, online financial calculators can offer more customized calculations, considering factors like expected investment returns, retirement age, and current net worth.
Reaching financial freedom is a dynamic process that requires regular reassessment and adjustment of goals and strategies. It’s about setting realistic targets, choosing suitable investments, and adapting to life’s changes. Remember, as Eleanor Roosevelt said, “It takes as much energy to wish as it does to plan.” Therefore, calculate your financial freedom number and craft a plan to achieve it, turning your dreams of a comfortable retirement into a tangible reality.
