When setting new goals or making new plans, the vast majority fall into one of two categories.
Health/fitness and money.
So today, we’ll show you how to get six-pack abs in just 8 minutes a day!
No, obviously we’re going to talk about money. Specifically, we’re going to be breaking down how you can be financially free in 10 years time. Because achieving financial freedom really is everyone’s goal, and 10 years is a number that comes up in conversations with our clients time and time again.
So let’s run the numbers and see what it might take for you to hit that (let’s face it, challenging) objective.
Seems an obvious place to start, right? You’d be surprised. Most of us have a vague idea in our mind as to what financial freedom looks like to us. The problem, however, is that it’s often just that, very vague.
Generally, our mind's eye gives us an idea of financial freedom that is focused on what’s not present. Specifically, we focus on removing financial stress or worry. We picture a life that involves doing whatever we want, whenever we want, and shopping without regard for the number on the receipt.
That’s fine, but it’s not very useful in creating a tangible picture of what financial freedom looks like to you. In order to gain a real understanding of how much money you need to be financially free, you need to create a detailed outline of your ideal life.
This needs to include the mundane stuff like utility bills and groceries and, of course, the exciting stuff like retreats, sports cars and Maison Estelle membership.
The more detail you can put together here, the more accurate your figures will be. Because once you have a big long list of expenses, the key to financial freedom is simply about mathematics. Working out exactly what level of assets you need in order to cover your listed expenses.
Today we want to get into the details of how you can hit that number rather than working out what that number is. But if you need some help, we have a range of free tools available here, or book a call with us to discuss your situation.
When it comes to achieving financial freedom, there are really two main ways it can be done. This is true no matter what your background, whether you’re a founder, climbing the corporate ladder, based in Lisbon or New York.
The key concept is that you need to amass a sufficient level of assets that will create passive income. And we’re not talking about the ‘passive’ income advice all over TikTok and Twitter that involves stuff like trading options, owning 14 flats or units or creating a YouTube channel.
None of those options is truly passive.
Realistically, the only true form of passive income is holding a diversified investment portfolio with professional managers in place. It’s the only structure that allows you to pay zero attention on a daily basis and still meet all of your income needs for life.
So how do you get there? Well, it’s going to take a Big Score or a Steady Plan. Which one is right for you?
We work with a lot of founders and tech entrepreneurs in particular. For many of them, their plan for becoming financially free is a big exit. Whether that’s an acquisition or an eventual IPO, they’re planning on one day receiving a huge sum of money for their business.
The idea being that once this happens, they won’t have to worry about money anymore and can build their ‘financially free’ life.
This is a noble plan, but the harsh truth is that for most people, it won’t work.
In the tech space, just 0.3% of Founders are able to take their concept from a business plan all the way through to a successful exit. So if you’re part of the startup Slack community with 1,000 members in that same situation, the data says that 3 of you will likely achieve the exit you’re looking for.
That’s why the Steady Plan makes sense for everyone, even those hoping for a Big Score.
This is where the magic happens. The Big Score relies on years of hard work, timing and luck, and there’s an overwhelming possibility that it won’t work. The Steady Plan is reliable, consistent and, if you do it right, about as close to a guarantee as you can expect.
Rather than hoping for a bigger company or new shareholders to provide you with a big cash sum at some unknown point in the future, you’re building it yourself.
The Steady Plan works by taking your number - the amount of money you need in order to be financially free - and then working backwards to ascertain what you need to put aside every month to hit it.
It involves making regular contributions into a diversified investment portfolio over a long period of time. Every month you take a set amount from your income and direct it into these investments.
You don’t try to time the market. You don’t chop and change your investments around. You create the plan and then automate it with direct transfers.
It sounds so simple. Maybe too simple. Perhaps you’re thinking that it can’t be that easy, that the numbers surely won’t work. Well, they do work, but just because it’s simple doesn’t mean it’s easy.
If you’re wanting to become financially free in just 10 years, it’s going to take some serious cash each month. Anyway, let’s run them and see.
Say you need an annual pre-tax income of £100,000 in order to meet your definition of ‘financially free’. We’ll use the 4% rule to work out our lump sum, but it’s a pretty rough guide. It’s a rule of thumb that says that taking 4% of the income generated by your assets is sustainable for the long term, e.g. retirement, without depleting your capital.
If you want a more specific number for your own lump sum, our app is awesome for that.
Anyway, using the 4% rule, it means you’d need £2.5 million to provide an annual passive income of £100,000 before tax is taken into account. So how do you get there in ten years?
We’re going to assume that you’ve already got at least £200,000 set aside in a combination of pensions, investments and cash. The outcome also depends heavily on the level of investment return you’re able to achieve.
This depends on a number of different factors and your attitude to risk, so we’ve included a few different rates of return below. Obviously, the higher the return you achieve, the less you need to contribute to become financially free in 10 years.
Seem a bit steep? 10 years is a short time frame when it comes to investing. Say you’re 35. Giving yourself until age 55 to become financially free means you’re still going to enjoy an early retirement, but also makes the contributions more achievable.
Let's take a look at these figures for a 20-year timeframe.
What about if we look at this another. Maybe you really want to be financially free, and you’re happy to reduce your income need to make that happen. In the table below, you can see how the lump sum and annual contribution reduce based on the level of income you’re aiming for.
These figures are based on a 5.5% return.
Whichever way you cut it, becoming financially free in ten years is not going to be easy. Realistically, the best approach for many is to take a combination of the strategies we’ve outlined above.
Putting in place a Steady Plan can all but guarantee that you’ll reach financial freedom eventually, while working hard towards a Big Score could give you a windfall which brings that outcome forward by many years.
Either way, the key to all of this is a long-term plan. If you want to discuss yours, get in touch with Rosecut today.