What's Your Freedom Number?
Since you’ve made it this far into the guide, you probably have a budget in place, and solid understanding of how much money flows in and out of your checking account on a monthly basis. How much are you spending? All you need to do is generate enough cash to cover your expenses. Once you’ve done that, you’re free. The goal is to replace your income with the money you’re making from your investments, so you don’t have to keep working forever. This is when you begin to have a taste of financial freedom. With that in mind, let’s set a goal for your investment fund. If we’re investing in “the stock market”, which returns about 10% per year, how much money do you need in your investment account to cover your expenses?
Living Expenses / Return On Investment = Fund Size
Using the formula above, we can get an idea of how big your investment fund needs to be in order to generate enough revenue to cover your living expenses. If you typically spend about $50,000 every year, you’ll need an account size of $500,000. This is our freedom number; the number required to generate enough cash to live off of. Easy enough, right? Of course, you’ll probably want to overshoot that a bit to give yourself some protection during bear markets, but this will give you a good number to work towards.
Now that we know how to grow an account, and the dollar amount we need to reach financial independence, let’s put it all together and start growing that nest egg!