Financial Freedom is thought of as the coveted holy grail of financial well-being and rightly so. Who wouldn’t want to be in a position to exercise the choice of being financially free enough to never have to work again to earn money? Sounds good to me anyway!
Now, if I asked you to quickly write down on the back of a napkin how much money you’d figure you’d need to be totally financially free, it would be fascinating to see what number you’d come up with. It’s actually a pretty tough exercise for most people to do with any level of accuracy. Not to worry, help is at hand with this 5 minute formula!
In a previous article, we used this 5 minute formula to work out the exact sum of money you’d need to reach the first 3 destinations on the road to wealth creation 1. Financial Protection; 2. Financial Security and; 3. Financial Independence). Here we’re going work out exactly how much money you’d need to reach the final 2 destination: Financial Freedom and then just for the hell of it, Absolute Financial Freedom. Here goes, hang on to your hat!
1. Financial Freedom
You will have achieved it when you have accumulated a sufficient critical mass of capital to provide enough income for you to live the lifestyle you desire (accounting for inflation) without ever having to work again for the rest of your life. The keyword here is ‘desire’. This is what differentiates being financially free from being financially independent, which is defined more by what you ‘require’ to live reasonably comfortably.
In essence, this would include having and enjoying all the luxuries in life such as:
Second Home in the Sun ($700,000) – $3, 500/month
35 Foot Boat ($150,000) – $1,500/month
Mercedes Benz ($100,000) – $1,000/month
1 Luxury Holiday ($12,000)- $1,000/month
Harley Davidson ($20,000) – $400/month
The additional monthly unearned income needed for these luxuries comes to $7,400/month i.e. $88,800/annum. Therefore the total cost of being financially free is the $51, 600/annum figure needed to achieve Financial Independence (which we worked out in a previous article) PLUS an additional $88,800/annum = $140,400/annum
Again, using the benchmark of an annual 8% return on investment would mean you’d therefore need a critical mass of capital amounting to $1, 755,000 in order to be financially free. So, as you can see it’s a decent sum of money but I believe within the realms of possibility for anyone who sets about achieving it and re-thinking their approach to income generation and financial planning.
2. Absolute Financial Freedom
When you think absolute financial freedom, think total rock star lifestyle! You can pretty much remove any financial limitations and pick up your air guitar for this one!
You will have achieved this financial level when you can pretty much do whatever you want, with whomever you want, as much as you want – without ever having to worry about money or work again.
So, assuming we’d still like to keep everything we have/do from our list, we now add all the new dream capital items we’d love to have that are not in our previous list. For example:
35-Yacht ($500,000) – $5, 000/month
Ferrari Testarossa ($250,000) – $2, 500/month
Piper Cherokee 140 or Cesna 172 Private Plane ($30,000) -$3000/month
Own desert island ($7,000,000) – $14,000/month
Additional monthly unearned income needed for these dream luxury items comes to $21,800/month i.e. $261,600/annum. Therefore the total cost of absolute financial freedom is the $140, 400/annum needed to achieve Financial Freedom PLUS an additional $261,600/annum = $402,000/annum
Again, using an annual 8% return on investment would mean you’d need a critical mass of capital amounting to $5, 025,000. So, by today’s standards it’s a very significant sum of money/capital. In order to have built up this level of personal wealth, you most likely will have become a noteworthy business owner and quite a sophisticated investor i.e. you’ll be a total money master!