How To Find Your Financial Freedom Number - Capable Wealth (2024)

Last week, we went into the real reason why you should be building wealth. One of the things I covered was the importance of finding your financial freedom number. In this post, we’re going to dive into the specifics of how you can find your freedom number, and a few others that I think you’ll find interesting.

Keep in mind that the real goal is not the money, but the freedom and control it gives you to live the lifestyle you desire.

WHAT IS YOUR FINANCIAL FREEDOM NUMBER?

Your Financial Freedom number is the amount of passive income needed in order to pay for your daily living expenses. It’s the amount of income required from your savings and investments that would allow you to quit your job and no longer work. That doesn’t mean you have to quit your job, but it gives you the freedom and control to do so if desired.

It also gives you the confidence to make decisions based on your own passions and desires.

Think about it: if you enjoy working at your office job, great. Good for you! But what if a company buys out your firm and replaces management with people you don’t get along with? If you don’t have financial freedom, there is little you can do about it, besides applying for other jobs and dealing with the unpleasant workplace until you get a new one.

By having financial freedom, you aren’t forced to make choices solely based on money, which will allow you to focus on your happiness and enjoyment.

How To Find Your Financial Freedom Number - Capable Wealth (1)

It makes it so you are never “stuck” doing something you don’t want to do.

The great thing about this exercise is that it’s not just one number you can strive toward. You can look at it as levels of financial success you can obtain along the path toward financial freedom.

LEVELS OF FINANCIAL SUCCESS

If you search around online, you’ll find many theories on what should be calculated into your financial freedom number and how you should go about obtaining it.

In all of my searching, the framework I’ve found that I like best is by a man you may have heard of – Tony Robbins.

I’m a big Tony Robbins fan and appreciate his work. In his book “Money: Master The Game“, Tony discusses a lot of topics. I highly recommend the book, although it’s a bit of an undertaking at over 600 pages in length.

In his framework for what he calls your “levels of financial dreams”, he lays them out into 5 different levels.

  1. Financial Security
  2. Financial Vitality
  3. Financial Independence
  4. Financial Freedom
  5. Absolute Financial Freedom

You don’t need to hit all five because the work and sacrifices necessary to achieve them might not be something you are willing to do. But you do need to understand what you want to strive for.

I like this framework because it shows you that there are different levels on the path toward financial freedom, each acting as a stepping stone that helps you progress in your financial life.

It also shows you that this process isn’t an all-or-nothing goal. You can have success without hitting freedom number.

THE LADDER OF FINANCIAL SUCCESS

Trying to go after your freedom number first is like trying to climb a ladder that only has one rung at the very top. Good luck trying to jump all the way up from the ground.

You need to build the lower rungs first, allowing you to climb up each subsequent rung, higher and higher, until you finally reach your freedom number (or whatever level you choose is ideal for you).

So, let’s begin with the first rung of the ladder.

HOW TO CALCULATE YOUR LEVELS OF FINANCIAL SUCCESS

Warning: As you work your way through the following calculations, make sure you factor in our good old friend, Uncle Sam. Yes, you need to factor taxes into the equation. Passive income coming from your investments will be taxed.

1 – Financial Security

Financial security isn’t about buying Caribbean islands or a yacht; it’s about creating the feeling you’d get by eliminating some of the foundational expenses most people deal with.

Things to include in your calculation:

  • Rent or mortgage
  • Food
  • Utilities (gas, electric, water, phone, etc.)
  • Transportation
  • Insurance Expenses

In order to find your financial security number, you need to add up all of these monthly costs, and then multiply them by 12 in order to find the annual cost. This will show you exactly how much passive income you need, annually, so you never have to worry about these expenses again!

Imagine never having to stress about any of those costs again. Man, that would feel pretty good.

I think for most people, even reaching this level would be an amazing place to be.

2 – Financial Vitality

The next rung in the ladder is Financial Vitality.

This level of financial success is a check-point on your path to financial independence and freedom. Hitting this level lets you know you are on the right path.

Things to include in your calculation:

  • Half of your monthly clothing costs
  • Half of your monthly dining and entertainment costs
  • Half of your current small indulgence or little luxury costs (gym membership, massage, etc.)

Once again, you’ll want to add these monthly costs up and then multiply by 12 to find the annual total. Take the total from these categories and add it to the number you got for Financial Security. The total number is your Financial Vitality number.

3 – Financial Independence

Financial Independence is the number you need to reach so that you no longer have to work.

It’s the point at which the interest from your savings and investments can completely fund your current lifestyle.

This should be pretty easy to calculate because you can just look through your bank and credit card statements to see how much you’re spending on a monthly basis.

However, a much easier way to do this is to sign up for an account aggregation tool like mint.com that will pull all of your accounts together and show you how much you are spending each month in different categories. (Mint is one of the recommendations found in my FREE “10 Tools To Simplify Your Financial Life”, which you can download by signing up for my subscription list.)

4 – Financial Freedom

In Tony Robbins’ book, he describes financial freedom like this:

“Financial Freedom would mean you’re independent, you’ve got everything you have today, plus two or three significant luxuries you want in the future, and you don’t have to work to pay for them either. To get there, you need to ask yourself, ‘What annual income would I need to have the lifestyle I want and deserve?’ What do you want the money for? Is it for the freedom to travel? To own a bigger home or a second vacation home? Maybe you’ve always wanted a boat or luxury car? Or do you want to contribute more to your community or church?”

Things to include in your calculation:

  • Luxury item #1 per month cost
  • Luxury item #2 per month cost
  • Donation per month

Take these totals and multiply by 12 to get your annual totals. Then, take the total from these categories and add it to the number you got for Financial Independence. The total number is your Financial Freedom number.

5 – Absolute Financial Freedom

In Tony’s Words:

“What would it be like if you could do anything you wanted, anytime you wanted? How would it feel if you and your family never had to want for anything again? What if you were able to give freely and live completely on your own terms, not anybody else’s, all without ever having to work to pay for it? The money you make while you sleep – your investment income – would provide for your unlimited lifestyle. Maybe you would buy your parents the home of their dreams, or set up a foundation to feed the hungry or help clean up the ocean. Just picture what you could do.

Now, as you can tell, for most people, this category is mostly for fun. In my seminars, I do this exercise only with people who have really big dreams and want to know the price of them. I understand that most people will never achieve Absolute Financial Freedom, but there’s power in dreaming and unleashing your desires.”

Things to include in your calculation:

  • Luxury item #1 per month
  • Luxury item #2 per month
  • Luxury item #3 per month

Take the total monthly costs above, multiply by 12 to get your annual income need, and then take the total from these categories and add it to the number you got for Financial Freedom. The total number is your Absolute Financial Freedom number.

DO YOU NEED TO BE AN OLYMPIAN?

If all of this seems a bit daunting, don’t worry; you don’t need to do it all at once. Actually, some of it you never have to do.

Choosing between something like Financial Security and Absolute Financial Freedom is like choosing between the decision to simply get off the couch and get healthy, or to train and go to the Olympics.

How To Find Your Financial Freedom Number - Capable Wealth (2)

You can certainly become healthy without going to the Olympics. Just like you can certainly gain financial security without obtaining Absolute Financial Freedom.

The amount of time, effort, and sacrifice it takes to become an Olympic athlete is monumental. The same can be said for you to reach Absolute Financial Freedom.

If you decide that you simply want to live a healthy lifestyle and stay active, you can choose to run a couple of miles each day, go to the gym, and try to eat a relatively healthy diet. By doing this, you will achieve a lot of success with regard to your health.

But if you say you want to become an Olympic athlete, you are talking about a whole other level of commitment.

The good thing is, when it comes to either your health or finances, you don’t have to be an “Olympic athlete.”

Reaching the levels of Financial Security, Vitality, or even Independence will provide you a great life.

I recommend getting started by setting yourself up with an account at Mint and figuring out your Financial Security number.

TWO SIDES OF THE SAME COIN

Don’t forget that obtaining these levels of success can happen not just by amassing more wealth, but also by lowering your expenses.

If you can cut down on the amount you are spending on all of the above areas, those numbers you need to reach will become much smaller.

It is certainly a give-and-take, but something for you to consider as you go through this exercise.

BEING FLEXIBLE IS OK

I’ll admit, I go back and forth on my numbers, but that’s ok. The important thing is to have a number you can begin with. If you want to make changes along the way, you can. You aren’t locked into whatever numbers you create through the above exercise.

As your interests and tastes change, so can your levels of financial success. But without going through the initial process, you’ll be hard-pressed to say exactly how much money you’ll need to reach your goal level.

WHERE TO NEXT?

So, now you know how to calculate your different levels of Financial Success. But how do you fund them?

Next week, we’ll dive into ways you can create passive income, helping you to make money while you sleep!

Getting paid to sleep? Now that sounds like a pretty sweet job!

Capably Yours,

How To Find Your Financial Freedom Number - Capable Wealth (3)

How To Find Your Financial Freedom Number - Capable Wealth (2024)

FAQs

How To Find Your Financial Freedom Number - Capable Wealth? ›

Take the total monthly costs above, multiply by 12 to get your annual income need, and then take the total from these categories and add it to the number you got for Financial Freedom. The total number is your Absolute Financial Freedom number.

How to determine your financial freedom number? ›

Total Annual Expenses / 12 = Freedom Number But, remember that your freedom number is just a starting point. Here are some additional things that you should consider: → Financial Freedom is Flexible: Reaching your freedom number doesn't necessitate quitting your job immediately.

How to find your financial freedom? ›

5-Step Plan to Achieve Financial Freedom:
  1. Invest in an Insurance Plan: ...
  2. Track Your Expenses: ...
  3. Clear Your Outstanding Debt: ...
  4. Invest In Equity: ...
  5. Build Passive Income:
Dec 12, 2023

How do you calculate financial independence number? ›

Similar to the 4% rule, the 25x rule uses your annual expenses to help determine your FI number. However, rather than assessing a safe withdrawal rate, it's a simpler calculation that assumes you'll require 25 times your annual expenses to retire early.

Is financial freedom the same as wealth? ›

It's important to recognize that financial freedom doesn't necessarily equate to being rich or having an unlimited amount of money. You may not have a lot of wealth, but you also may not have a lot of expenses. For example, you could have no debt but also not own a car or property and still be financially free.

What's my freedom number? ›

Your Financial Freedom number is the amount of passive income needed in order to pay for your daily living expenses. It's the amount of income required from your savings and investments that would allow you to quit your job and no longer work.

What is my fu number? ›

To be sustainable, your savings and investments will need to produce returns that can support your lifestyle without being depleted. Therefore, your financial independence number is the total assets you need to live without withdrawing more than 4% a year.

How do I know my fi number? ›

Once you project your future expenses, it's time to calculate your FI number. Representing the reverse of the 4% rule, the calculation is annual expenses multiplied by 25.

What is the formula for calculating personal wealth? ›

To calculate your net worth, you subtract your total liabilities from your total assets. Total assets will include your investments, savings, cash deposits, and any equity that you have in a home, car, or other similar assets. Total liabilities would include any debt, such as student loans and credit card debt.

How much money do you get if you are financially independent? ›

Americans say they'd need to earn about $94,000 a year on average to feel financially independent. That's about $20,000 more than the median household income of $74,580.

How do you calculate money for financial freedom? ›

It takes a few basic inputs from you, such as your present corpus, current living expenses, estimated inflation rate, life expectancy, and estimated post retirement returns. Based on these inputs, it will calculate whether you have a sufficient amount to achieve financial freedom.

What are the 7 levels of financial freedom? ›

The Seven levels of Retiring Early with FIRE
  • Level 1: Clarity. It's important to know where to start. ...
  • Level 2: Self-Sufficiency. Stand on your own two feet financially. ...
  • Level 3: Breathing Room. ...
  • Level 4: Stability. ...
  • Level 5: Flexibility. ...
  • Level 6: Financial Independence. ...
  • Level 7: Abundant Wealth.

What is the 4 rule for financial freedom? ›

The 4% rule suggests that retirees can safely withdraw 4% of their portfolio in the first year of retirement and then adjust that amount annually for inflation over the course of at least 30 years without having to worry about ever running out of money.

How do you determine your FIRE number? ›

If you multiply your annual expenses by 25, you get the same result as dividing those expenses by 4% - that's your FIRE number. Calculating your FIRE number involves several steps that demand a clear understanding of your current financial state and a projection of your future needs and wants.

How do you determine your retirement number? ›

Your personal retirement number is defined as a simple estimate (excluding tax considerations, personal expense obligations and other factors) of the minimum assets you will need to have at your selected retirement age to replace 85% (or the percentage you selected) of your pre-retirement income before taxes.

What is the 4% rule for financial freedom? ›

The 4% rule says people should withdraw 4% of their retirement funds in the first year after retiring and take that dollar amount, adjusted for inflation, every year after. The rule seeks to establish a steady and safe income stream that will meet a retiree's current and future financial needs.

How do you know if you have financial freedom? ›

Your ability to pay bills and instalment on time on time without disrupting your personal cash flow is a sign that you're on the right track toward financial freedom. You are starting to set aside some of your income for investment, either via saving or any other financial investment instruments.

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