Financial Freedom: What It Takes To Free Yourself From Work

Everyone dreams of achieving wealth. Maybe you want to travel the world, quit a difficult job or sleep in on weekdays.

These ideas all center around forms of freedom. Specifically, it’s personal financial freedom: having enough money that you don’t need to work to cover your basic necessities.

Realistically, how much money would it take for you to be that free? It might seem incredible, but it’s possible. If it’s a goal, or if you’re just curious, consider the following.

1.) What’s your number?

Traditional retirement planning assumes you withdraw money from an account for all of your expenses, so you expect to spend a certain amount each year. Multiply that number by the number of years you expect to live after retirement, factor in inflation and a modest rate of return, and that’s it. For financial freedom, though, the number is different.

Financial freedom before retirement, or interest-only retirement, means your capital is generating a stable rate of return, which is your only source of income. This is preferable because you don’t know how long you’ll live.

The math is simple. Multiply your desired yearly income by 66.6 (a 4% annual rate of return, less a 3% rate of interest), and that’s what you’d need. For example, a $50,000 yearly income would require about $3.3 million. That’s a lot, but it’s attainable.

This is especially true if you’re willing to live on less. If you live simply in an area with a low cost of living, you can survive on $30,000. To get there, you’d need just under $2 million. It’s a big number, but it’s reasonable for a person to save in their lifetime.

2.) How can you get there?

Two habits kill the move toward financial freedom: consumer debt and lifestyle inflation.

Consumer debt includes credit cards, auto loans, and other big-ticket purchases. Anything that you’re borrowing money to get that won’t increase in value falls into this category.

Lifestyle inflation is purchasing goods based on the mistaken belief that you need them. Lowering your lifestyle expenses helps you reach financial freedom by lowering your savings target and leaving you with more money to save.

Financial freedom means living below your means for the rest of your life, saving at least half of every paycheck until you have enough to retire on the interest.

3.) Take a shortcut

Financial freedom doesn’t have to be complete, or forever. Having enough money to last a year of unemployment, or to quit your day job and live off your investments and passion projects can also be a freeing feeling. Reducing your time frame and increasing your freedom income cuts downs the amount you need to save.

Check out some of the great resources from GreenPath Financial Wellness, a financial education, and counseling program for DCFCU Members and hopefully, you will be on your way to Financial Freedom.