It’s a big question, but probably not the right question. Being ‘financially free’ is kind of like being ‘fit and healthy’ or even ‘being happy’. It sounds like a worthy goal, but what does it really mean?
To some people, being fit and healthy means being able to climb the stairs without working up a sweat. For others it means running an ultramarathon every weekend. Financially free can mean having enough each month to pay the mortgage and fill the fridge with groceries for some families, while others won’t feel financially free unless they can retire and take the family overseas every single month.
None of these are right or wrong, but in order to answer the question for yourself, you need to get down to the granular details.
We’re going to help you with that now.
This is where it all starts. You want to be financially free? Well what does that mean to you? This is not about coming up with some more generic statements like ‘Not having to worry about money’ or ‘Giving my kids a good life’.
We’re talking specifics here.
Close your eyes and picture what a financially free life looks like to you. Are you working or not? If so, how much are you working? What kind of house do you have? What car are you driving? Are your kids at private school? Are you taking a ski holiday every year?
The more detailed this picture in your mind becomes, the better your planning can be.
Before your drift off into the world of make believe, remember we’ve got to put a price tag on this lifestyle. So while you might like the idea of spending summers in the Med on a yacht fit for Jeff Bezos, it’s important to draw the line between financially free and billionaire.
Once you’ve done this exercise, get it all down on paper. That house you envisage, how much is it going to cost? If you already live in your dream home, what does it cost in upkeep and mortgage costs (if you have one)?
Carry on down the list and work out the cost for all of the various components of your ideal life. The private school fees, the utility bills, the holidays, the gifts to charity or your children, the clothing and jewellery, cleaners, childcare, groceries, all of it.
It should look something like this:
The above list isn’t exhaustive, it’s just an example. Your own list will likely be a lot longer, and the figures might be higher or lower than these.
But the key outcome is that you’ll end up with a total estimated cost to fund your ideal lifestyle. Now we’re getting somewhere. Now we can start to actually answer the question, how much money do I need to be financially free?
Because that right there is your answer. To be financially free, you need to be able to generate (in our example) £160,000 each year. Your answer will be whatever the total equates to on your own list. Now obviously the goal posts are going to shift and change as your lifestyle does, but it’s a very good place to start.
Again, this is a very important factor which will massively influence the asset base you need to build in order to meet your definition of financial freedom. Essentially the question is, what does financial freedom look like to you from a work perspective?
Does it mean that you never have to work again? Or at least not having any reliance on income from a job to meet your living expenses.
Or does it mean being able to continue to work your normal job or run your business, with the expectation of a certain level of income being brought in each year from that.
The reason this is so important is because it makes a major difference to the assets needed to fund your lifestyle. If your idea of financial freedom is to stop work entirely, that means you’d need to fund the full amount from investments and passive income.
If you plan to continue earning, say £100,000 a year from your career or a business, that asset requirement drops significantly.
It may be a hybrid approach. Perhaps you won’t want to work as many hours, but you’ll still plan to work. Maybe you’d take on consultancy work rather than a set 9-5. Either way, it’s a hugely important part of your numbers.
You can adjust your spreadsheet like so:
Now that you’ve got an annual figure you can start to work out how you can generate that level of income. This sounds pretty simple but it can be deceptively challenging to do accurately. There are some rules of thumb which we’ll get into shortly, but really the best way to properly work this out is to speak to a professional.
At Rosecut we work very closely with our clients to calculate exactly what level of assets they need in order to support their lifestyle. This can be adjusted based on changes over your lifetime, such as kids leaving school or you selling a business, to make sure they are tailored to you, rather than just generic rules of thumb.
As far as rules of thumb go, the most widely quoted is the 4%. This states that a 4% withdrawal rate from an investment portfolio is sustainable over the long term, without reducing the initial capital sum.
So if you were to need a regular income of £75,000 each year, that means a lump sum of £1,875,000 would be needed in order to support that.
Now, you’ve answered the question. You know much money you need on an annual basis to meet your own definition of financial freedom, as well as the lump sum required to fund it.
But there are a couple of roadblocks that could derail you from truly feeling financially free.
If you’re not careful, it’s very easy to feel like you always need more. The numbers you come up with now may seem like they’re simply not enough in a few years time. That’s because we’re hardwired to be fearful, and unfortunately some of the more unscrupulous ‘professionals’ out there are happy to play on those fears.
Private bankers in particular are very good at making you feel like you don’t have enough.
They cleverly design their service offering to provide a constant carrot, to make you feel as if financial freedom really hits when you have access to their “private office” offering or inner investment circle or whatever other marketing buzzword they’ve chosen.
This can make the chase for financial freedom a never ending pursuit. Ironically, feeling as if you’re never quite at the summit can take away enjoyment from other areas of your life, making sure you’re never free, regardless of your level of material wealth.
We take a very different approach at Rosecut.
We believe in helping our clients achieve financial freedom. We believe in helping our clients amass substantial wealth. But we believe in doing this in a way which enriches their lives in totality, not just the number on their investment statement.
So if you want to live a comfortable, happy, fulfilling and financially free life, and you need help with the financial roadmap to help you get there, get in touch. We’ll have a no cost, no obligation discussion around what that means for you, and the steps you need to take to get there.
Please note that this is not a financial advice and it does not take into account individual circumstances. Please also contact a professional advisor prior to any decision making.
The value of an investment and the income from it can go down as well as up and investors may not get back the amount invested. This may be partly the result of exchange rate fluctuations in investments which have an exposure to foreign currencies. You should be aware that past performance is no guarantee of future performance.