Last week, we went into the real reason why you should be building wealth. One of the things I covered was the importance of finding your financial freedom number. In this post, we’re going to dive into the specifics of how you can find your freedom number, and a few others that I think you’ll find interesting.
Keep in mind that the real goal is not the money, but the freedom and control it gives you to live the lifestyle you desire.
WHAT IS YOUR FINANCIAL FREEDOM NUMBER?
Your Financial Freedom number is the amount of passive income needed in order to pay for your daily living expenses. It’s the amount of income required from your savings and investments that would allow you to quit your job and no longer work. That doesn’t mean you have to quit your job, but it gives you the freedom and control to do so if desired.
It also gives you the confidence to make decisions based on your own passions and desires.
Think about it: if you enjoy working at your office job, great. Good for you! But what if a company buys out your firm and replaces management with people you don’t get along with? If you don’t have financial freedom, there is little you can do about it, besides applying for other jobs and dealing with the unpleasant workplace until you get a new one.
By having financial freedom, you aren’t forced to make choices solely based on money, which will allow you to focus on your happiness and enjoyment.
It makes it so you are never “stuck” doing something you don’t want to do.
The great thing about this exercise is that it’s not just one number you can strive toward. You can look at it as levels of financial success you can obtain along the path toward financial freedom.
LEVELS OF FINANCIAL SUCCESS
If you search around online, you’ll find many theories on what should be calculated into your financial freedom number and how you should go about obtaining it.
In all of my searching, the framework I’ve found that I like best is by a man you may have heard of – Tony Robbins.
I’m a big Tony Robbins fan and appreciate his work. In his book “Money: Master The Game“, Tony discusses a lot of topics. I highly recommend the book, although it’s a bit of an undertaking at over 600 pages in length.
In his framework for what he calls your “levels of financial dreams”, he lays them out into 5 different levels.
- Financial Security
- Financial Vitality
- Financial Independence
- Financial Freedom
- Absolute Financial Freedom
You don’t need to hit all five because the work and sacrifices necessary to achieve them might not be something you are willing to do. But you do need to understand what you want to strive for.
I like this framework because it shows you that there are different levels on the path toward financial freedom, each acting as a stepping stone that helps you progress in your financial life.
It also shows you that this process isn’t an all-or-nothing goal. You can have success without hitting freedom number.
THE LADDER OF FINANCIAL SUCCESS
Trying to go after your freedom number first is like trying to climb a ladder that only has one rung at the very top. Good luck trying to jump all the way up from the ground.
You need to build the lower rungs first, allowing you to climb up each subsequent rung, higher and higher, until you finally reach your freedom number (or whatever level you choose is ideal for you).
So, let’s begin with the first rung of the ladder.
HOW TO CALCULATE YOUR LEVELS OF FINANCIAL SUCCESS
Warning: As you work your way through the following calculations, make sure you factor in our good old friend, Uncle Sam. Yes, you need to factor taxes into the equation. Passive income coming from your investments will be taxed.
1 – Financial Security
Financial security isn’t about buying Caribbean islands or a yacht; it’s about creating the feeling you’d get by eliminating some of the foundational expenses most people deal with.
Things to include in your calculation:
- Rent or mortgage
- Food
- Utilities (gas, electric, water, phone, etc.)
- Transportation
- Insurance Expenses
In order to find your financial security number, you need to add up all of these monthly costs, and then multiply them by 12 in order to find the annual cost. This will show you exactly how much passive income you need, annually, so you never have to worry about these expenses again!
Imagine never having to stress about any of those costs again. Man, that would feel pretty good.
I think for most people, even reaching this level would be an amazing place to be.
2 – Financial Vitality
The next rung in the ladder is Financial Vitality.
This level of financial success is a check-point on your path to financial independence and freedom. Hitting this level lets you know you are on the right path.
Things to include in your calculation:
- Half of your monthly clothing costs
- Half of your monthly dining and entertainment costs
- Half of your current small indulgence or little luxury costs (gym membership, massage, etc.)
Once again, you’ll want to add these monthly costs up and then multiply by 12 to find the annual total. Take the total from these categories and add it to the number you got for Financial Security. The total number is your Financial Vitality number.
3 – Financial Independence
Financial Independence is the number you need to reach so that you no longer have to work.
It’s the point at which the interest from your savings and investments can completely fund your current lifestyle.
This should be pretty easy to calculate because you can just look through your bank and credit card statements to see how much you’re spending on a monthly basis.
However, a much easier way to do this is to sign up for an account aggregation tool like mint.com that will pull all of your accounts together and show you how much you are spending each month in different categories. (Mint is one of the recommendations found in my FREE “10 Tools To Simplify Your Financial Life”, which you can download by signing up for my subscription list.)
4 – Financial Freedom
In Tony Robbins’ book, he describes financial freedom like this:
“Financial Freedom would mean you’re independent, you’ve got everything you have today, plus two or three significant luxuries you want in the future, and you don’t have to work to pay for them either. To get there, you need to ask yourself, ‘What annual income would I need to have the lifestyle I want and deserve?’ What do you want the money for? Is it for the freedom to travel? To own a bigger home or a second vacation home? Maybe you’ve always wanted a boat or luxury car? Or do you want to contribute more to your community or church?”
Things to include in your calculation:
- Luxury item #1 per month cost
- Luxury item #2 per month cost
- Donation per month
Take these totals and multiply by 12 to get your annual totals. Then, take the total from these categories and add it to the number you got for Financial Independence. The total number is your Financial Freedom number.
5 – Absolute Financial Freedom
In Tony’s Words:
“What would it be like if you could do anything you wanted, anytime you wanted? How would it feel if you and your family never had to want for anything again? What if you were able to give freely and live completely on your own terms, not anybody else’s, all without ever having to work to pay for it? The money you make while you sleep – your investment income – would provide for your unlimited lifestyle. Maybe you would buy your parents the home of their dreams, or set up a foundation to feed the hungry or help clean up the ocean. Just picture what you could do.
…
Now, as you can tell, for most people, this category is mostly for fun. In my seminars, I do this exercise only with people who have really big dreams and want to know the price of them. I understand that most people will never achieve Absolute Financial Freedom, but there’s power in dreaming and unleashing your desires.”
Things to include in your calculation:
- Luxury item #1 per month
- Luxury item #2 per month
- Luxury item #3 per month
Take the total monthly costs above, multiply by 12 to get your annual income need, and then take the total from these categories and add it to the number you got for Financial Freedom. The total number is your Absolute Financial Freedom number.
DO YOU NEED TO BE AN OLYMPIAN?
If all of this seems a bit daunting, don’t worry; you don’t need to do it all at once. Actually, some of it you never have to do.
Choosing between something like Financial Security and Absolute Financial Freedom is like choosing between the decision to simply get off the couch and get healthy, or to train and go to the Olympics.
You can certainly become healthy without going to the Olympics. Just like you can certainly gain financial security without obtaining Absolute Financial Freedom.
The amount of time, effort, and sacrifice it takes to become an Olympic athlete is monumental. The same can be said for you to reach Absolute Financial Freedom.
If you decide that you simply want to live a healthy lifestyle and stay active, you can choose to run a couple of miles each day, go to the gym, and try to eat a relatively healthy diet. By doing this, you will achieve a lot of success with regard to your health.
But if you say you want to become an Olympic athlete, you are talking about a whole other level of commitment.
The good thing is, when it comes to either your health or finances, you don’t have to be an “Olympic athlete.”
Reaching the levels of Financial Security, Vitality, or even Independence will provide you a great life.
I recommend getting started by setting yourself up with an account at Mint and figuring out your Financial Security number.
TWO SIDES OF THE SAME COIN
Don’t forget that obtaining these levels of success can happen not just by amassing more wealth, but also by lowering your expenses.
If you can cut down on the amount you are spending on all of the above areas, those numbers you need to reach will become much smaller.
It is certainly a give-and-take, but something for you to consider as you go through this exercise.
BEING FLEXIBLE IS OK
I’ll admit, I go back and forth on my numbers, but that’s ok. The important thing is to have a number you can begin with. If you want to make changes along the way, you can. You aren’t locked into whatever numbers you create through the above exercise.
As your interests and tastes change, so can your levels of financial success. But without going through the initial process, you’ll be hard-pressed to say exactly how much money you’ll need to reach your goal level.
WHERE TO NEXT?
So, now you know how to calculate your different levels of Financial Success. But how do you fund them?
Next week, we’ll dive into ways you can create passive income, helping you to make money while you sleep!
Getting paid to sleep? Now that sounds like a pretty sweet job!
Capably Yours,
