Are you ready to calculate your financial freedom number? Today we take the first step in determining how to much you need to achieve financial freedom.

In today’s newsletter we’ll calculate your financial freedom number using:

• Your annual expenses

• The number of years from now you want to be financially free

• Inflation

Some important reminders:

• Your financial freedom number is the amount of money YOU need to have invested in order to live off the passive income generated by your investments.

• It depends on your preferred lifestyle and annual expenses. The lower your annual expenses, the lower your Financial Freedom Number will be.

Financial Freedom Formula

We’ll use the formula below:

FF = (A / 5%) * (1 + i)^n

FF = Financial Freedom Number

A = Annual Expenses

i = Assumed inflation rate

n = Number of years until you want to be financially free

Calculate your annual expenses

• This includes everything from rent and groceries to entertainment and travel.

• Be honest with yourself and don't forget any recurring expenses.

• If you are not sure where to start with this, I recommend either downloading a personal finance app that tracks your spending for you or manually records your expenses for a month and multiply that amount by 12 to annualize it.

Divide your annual expenses by 5%

• I use this to determine how much I need to have invested in order to live off the passive income my investments generate without ever running out.

• I am able to have three years worth of cash set aside so I don’t have to stress when the stock market has a down year.

• I plan to have my portfolio mostly consist of diversified dividend ETFs to provide myself with passive income to live off of.

Factor in inflation

• Have you noticed how things have gotten a lot more expensive over the past few years? This is caused by inflation.

• Inflation is the silent wealth killer people forget to take into account when thinking about financial freedom.

• Historically, inflation has been 3% so this is what I like to assume when calculating my financial freedom number.

Example

• My annual expenses are $100,000

• I assume an inflation rate of 3%

• My goal is to be financially free in 20 years.

Lets see what that looks like 👇

(100,000/5%) * (1 + .03)^20 = $3,612,222

Wrap Up

If you are feel overwhelmed, don’t worry! You don’t need to come up with that large amount all by yourself. That’s what your investments are for. By investing your money and giving it time, you will only have to contribute a fraction of whatever your financial freedom number is. The key is you have to get started!

If you are unsure how, you’ll want to check out next week’s post on how to get started with investing, with only one dollar! Investing is not just meant for the rich. Be sure you are subscribed so you don’t miss it! If you know anyone who’s interested in retiring early or could use a weekly newsletter about personal finance, share the link below.

Keep dreaming big and taking action towards your financial goals!

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