Do You Know Your Financial Freedom Number?
Do you know your Financial Freedom Number? You might ask, "What is that?"
Your financial freedom number is the magic number that will allow you to keep your lifestyle even if you are not working. Basically, knowing this number will allow you to keep the lifestyle you are accustomed to without downsizing.
You need to plan how much money you will spend each month and at the same time have enough money coming in to keep living without worrying about your bills, expenses or running out of money.
How Do You Calculate Your Financial Freedom Number or FFN?
Before we determine what your FFN is, we need to know how much money you are spending now and what kind of lifestyle you are used to. One way to determine this is by looking at your expenses 6 to 12 months back and get the average.
For example, if you spend $4,000 in housing, transportation, and living expenses, then you spend roughly $48,000 a year. Now, don't forget that inflation will affect this number, too.
In 2016, the Bureau of Labor Statistics said that the "inflation rate is only 1.7%." Inflation is an upward movement in the average level of prices. Each month the Bureau of Labor Statistics reports the average prices when it releases the CPI (Consumer Price Index).
Now, the reality is, inflation does exist, and prices are expected to keep going up.
Here are a few things to take into consideration.
If you are currently a homeowner with a mortgage, but in a few years your home is going to be free and clear, make sure to account for it in your FFN, but don’t forget your taxes and insurance.
Also, consider that healthcare might go up as you age.
Here are some other things to take into consideration.
Are you planning to travel more? Are you going to take on a new hobby or sport, like golf? These things cost money.
Now it is time to determine how much money you will need each month. At least 3% to 4% of your income should be your monthly withdrawal, so you don't deplete your money right away. This is kind of like budgeting in the future.
Here is how you calculate your FFN:
FFN = Yearly Expenses divided by 4%
So if your yearly needed expenses are $48,000 a year, divide that by 4%, and that will determine your FFN.
$48,000 / 4% = $1,200,000
In this example, once you have $1,200,000, you have achieved Financial Freedom.
One thing that you have to keep an eye on is that if you have that on accounts like 401k, IRAs, Stocks, and Bonds, you’ll have to pay taxes and management fees. This could cut as much as 35% of your assets.
You might be thinking, "I might never be able to retire."
If you are an entrepreneur, you should aim for Financial Freedom. Entrepreneurs are the ones that have the best opportunities to grow their wealth and be able to achieve their FFN.
Why? Because as an entrepreneur, you should not have an income ceiling. You should be able to make as much money as you want.
If you are having difficulty calculating your FFN, don’t forget that I am here for you. And remember that “Financial Education Is the Path to Freedom.”
Sara Chevere is the Creator and Founder of The Financially Fit Women. She helps women, couples, and entrepreneurs to become financially fit by teaching them about money. Sara has been in the Finance and Mortgage Industry for over 17 years. She loves to talk about money, and her mission is to educate and empower you to have the confidence to achieve financial freedom.
"Financial Education is The Path to Freedom" - Sara Chevere