Financial freedom is considered the coveted holy grail of financial wellness, and with good reason. Who wouldn’t want to be able to exercise the option of being financially free enough to never have to work to earn money again? Sounds good to me anyway!
Now, if I asked you to quickly write on the back of a napkin how much money you think you need to be totally financially free, it would be fascinating to see what number you would get. It’s actually quite a difficult exercise for most people to do with any level of accuracy. Don’t worry, help is at hand with this 5-minute formula!
In a previous article, we used this 5 minute formula to calculate the exact amount of money you would need to reach the first 3 destinations on the road to wealth creation 1. Financial protection; 2. Financial security and; 3. Financial Independence). Here we are going to calculate exactly how much money you would need to get to Final Destination 2: Financial Freedom and then, just for the hell of it, Absolute Financial Freedom. Here goes, hold onto your hat!
1.Financial freedom
You will have achieved this when you have accumulated a sufficient critical mass of capital to provide enough income to live the lifestyle you want (adjusting for inflation) without having to return to work for the rest of your life. The key word here is ‘desire’. This is what differentiates being financially free from being financially independent, which is defined more by what you ‘need’ to live reasonably comfortably.
In essence, this would include having and enjoying all of life’s luxuries, such as:
- Second home in the sun ($700,000) – $3,500/month
- 35 foot boat ($150,000) – $1,500/month
- Mercedes-Benz ($100,000) – $1,000/month
- 1 luxury vacation ($12,000)- $1,000/month
- Harley-Davidson ($20,000) – $400/month
The additional monthly non-work income required for these luxuries amounts to $7,400/month, or $88,800/year. So the total cost of being financially free is the $51,600 per year figure needed to achieve financial independence (which we calculated in a previous article) PLUS $88,800 per year = $140,400 per year
Again, using the benchmark of an 8% annual return on investment would mean that you would need a critical mass of capital of $1,755,000 to be financially free. So, as you can see, it’s a decent sum of money, but I think it’s well within the realm of possibility for anyone who sets out to pull it off and reconsider their approach to income generation and financial planning.
2. Absolute financial freedom
When you think of absolute financial freedom, think of the total lifestyle of a rock star! You can practically remove any financial limitation and choose your air guitar for this one!
You will have reached this financial level when you can do just about anything you want, with whomever you want, anything you want, without ever having to worry about money or work again.
So assuming we’d still like to keep everything we have/do on our list, we now add all the new dream capital items we’d love to have that aren’t on our old list. For example:
- 35 yachts ($500,000) – $5,000/month
- Ferrari Testarossa ($250,000) – $2,500/month
- Piper Cherokee 140 or Cesna 172 Private Jet ($30,000) – $3000/month
- Own desert island ($7,000,000) – $14,000/month
The additional monthly non-work income needed for these dream luxury items is $21,800/month, or $261,600/year. Therefore, the total cost of absolute financial freedom is $140,400/year needed to achieve financial freedom PLUS an additional $261,600/year = $402,000/year
Again, using an 8% annual return on investment would mean that you would need a critical mass of capital of $5,025,000. So by today’s standards, it’s a very significant sum of money/capital. To have accumulated this level of personal wealth, you will most likely have become a remarkable business owner and quite a sophisticated investor, which is to say, you will be a total master of money!
conclusion
So, there you have it! Financial Freedom and Absolute Financial Freedom defined in terms of an absolute sum of money required each year. So now you know EXACTLY what it will take for you to eventually stop working for money and finally have money working for you; to escape the daily grind and retire to Margaritaville…if you so choose! Check out my other articles on personal finance, business, and wealth building tips to help you reach the goal of financial freedom… fast!