7 free tips to calculate your financial freedom number today

Hey there, Individual Investor!

Have you ever wondered how much money you would need to achieve financial freedom?

Many busy professionals dream of escaping the 9-5 grind and retiring early, but the path to financial freedom often seems complicated and out of reach.

Most of us have fanaticized about what it would be like, but never take the first step. If you don't know where you are going, how can you get there?  

Understanding and calculating your financial freedom number is a crucial first step in making that dream a reality.

Common Challenges in Achieving Financial Independence

One of the most significant challenges busy professionals face is defining what financial freedom means to them.

Without a clear understanding, it’s impossible to calculate a target number that will allow you to retire early and live the life you desire. Many people try to save and invest without a clear plan, hoping their efforts will eventually lead to financial independence.

However, without a concrete financial freedom number, it’s easy to lose focus and direction, leading to suboptimal financial decisions.

So today, I want to share with you 7 powerful tips for calculating your freedom number so you can find direction and close the gap between you and your goals.  

1. Define Financial Freedom for Yourself

Think about what financial freedom means to you.

Is it retiring early, traveling the world, or simply having the peace of mind that comes with financial security? 

What financial freedom means to be may be way different than what it means for you. Maybe your number is how much you need to get out of debt, escape living paycheck to paycheck, or have enough money that you can work part-time and spend more time with your kids. 

Personally, I define financial freedom as reaching financial independence, the point when I have enough money that I can live off my investments and never work again. 

Clearly defining your goal is the first step.

There isn't a one size fits all for this but here are some guidelines for targets: 

Seven Levels of Financial Freedom

1. Clarity, when you figure out where you are and where you want to go. 

2. Self-sufficiency, when you earn enough money passively to cover your expenses on your own = 1 times your monthly expenses. 

3. Breathing Room, when you escape living paycheck to paycheck = 3 to 5 times your monthly expenses. 

4. Stability, when you have 6 months of living expenses saved and your debts repaid = 6 times your monthly expenses. 

5. Flexibility, when you have two years of living expenses invested = 24X your monthly expenses. 

6. Financial Independence, when you can live off the income generated by your investments forever so work becomes optional. 

7. Abundant wealth, when you have more money than you will ever need. 

2. Calculate Your Monthly Expenses

While the most accurate way to calculate your number is to determine how much you will need to live on for the rest of your life, it is impossible to determine because you don't know your goals, desires, wants, and needs are going to change over the next 10-20 years. 

This is why I recommend you focus on what you spend now and adjust it as you change and grow. 

Track your monthly expenses to get a clear picture of your current financial situation. Include everything from rent/mortgage, utilities, groceries, and entertainment.

This forms the basis for understanding how much you need to sustain your lifestyle. 

You can do this easily by using online tools like YNAB, MINT, and Betterment. My personal favorite is YNAB. 

3. Determine Your Desired Annual Passive Income (how much you actually need) 

To help you figure out how much money you need to retire, almost everybody who sells financial products offer a retirement calculator. 

The problem with these calculators is that they try to help you figure out how much money you need to retire in 40 years from now not in the next 5-10 years. Also, these calculators assume that the amount of money you will need when you retire is all the money you will have to live on for the rest of your life. 

People who invest their money and make money with little input other than what it takes to setup their account and manage their investments make what is called passive income. This is a money maker's holy grail. 

Once you reach the point where you no longer trade time for money, you can spend your time on whatever you want. Remember that the key to compounding is that the earlier and more you invest, the faster your money will grow. You will need less money now to retire, than you will in the future because you have more time to compound. 

Decide how much annual passive income you need to cover your projected expenses.

This is your target number that will allow you to live comfortably without relying on active employment.

For illustration purposes, imagine you have $1M invested and it grow 10% per year (100-year average of S&P), you will earn $100K over the course of a year. 

Now let's say you need 40K to cover your expenses. 

If it's a taxable account, you can withdraw $40K which will leave you with $1,060,000 that will continue to compound and grow.

The key is to never withdraw more than you make so you never run out of money. 

Knowing this will help you more accurately calculate your number better than any retirement calculator. 

4. Calculate Your Financial Freedom Number

You just need to know how much money you need to have invested before you can live off a portion of the returns while holding back some of them to continue to compound and grow. 

Use the 4% withdraw rule to calculate your financial freedom number. 

Multiply your desired annual passive income by 25.

For example, if you need $50,000 annually, your financial freedom number is $1.25 million.

While this number will probably be more than enough, this is a conservative rule that assume that your returns are capped out at 7-10% annually. 

As you become more adept at investing and creating side-hustle income streams, you can dramatically decrease this number by increasing performance and getting paid to do things you enjoy. 

Before you work on that though, you need to know where you are. 

5. Assess Your Current Savings and Investments

Take stock of your current financial assets, including savings, investments, and retirement accounts.

This gives you a starting point and helps you understand how far you are from your goal.

6. Create a Plan to Bridge the Gap

Develop a strategy to reach your financial freedom number.

This may include increasing your savings rate, learning investing systems that increase your performance, or creating additional streams income to offset your passive income steam.

It may help to breakdown your goal into manageable chunks.

You can use this formula to determine how much you need to save every year to reach your goal.

S=(Y-A*(1+r)^n/(((1+r)^n-1)/r)

S= how much you need to save each year to hit your number by the time you want to retire 

Y= your number

A= amount you already have invested (aka your principal)

r= annual compounding rate (as a decimal - i.e., 7 percent = 0.07

n= number of years to retirement  

You can use this online calculator to manipulate the variables and redefine your number. 

For instance, see how increasing your performance (r) will change your number or the amount you already have saved (A). 

7. Monitor and Adjust Your Plan Regularly

Regularly review your progress and adjust your plan as needed.

Life circumstances and financial markets change, so it’s essential to stay flexible and make updates to stay on track.

My Personal Example: 

I'm a 38-year-old engineer and investment advisor, dreaming of retiring by 43 to live a life free to do whatever I want with my time. 

I define financial freedom as having enough passive income to cover my $100K in annual expenses (money I want for my desired lifestyle minus passive income generated by my asset management company). By following the tips above, I calculate my financial freedom number to be $733,000.

Currently, I have $100,000 in taxable brokerage savings and investments and I have $633,000 in IRA retirement savings (not included in this calculation).

I create a plan to save and invest aggressively over the next 5 years, focusing on increasing my investment performance, cutting unnecessary expenses, paying down debt and creating more passive income streams. I plan to regularly review my progress and adjusts my strategy to stay on course.

Inputs and results using the online calculator: 

Benefits and Outcomes

By following these expert tips, you’ll gain clarity and direction, empowering you to make informed financial decisions. You’ll feel excited and hopeful about your financial future, knowing you have a concrete plan to achieve financial independence.

Action Step

Start defining what financial freedom means to you and calculate your financial freedom number. It’s the first step toward achieving the life you’ve always dreamed of.