For every $100 you spend each month, you need roughly $30,000 in invested capital to reproduce it without traditional income.
Wait, how did we get here? Cue the “That escalated quickly” memes.
If you’ve been hanging around this corner of the internet for a little while now, you may be acquainted with some of the “4% rule” research that helps serve as a guidepost for helping us understand how much ca$h money we need to accumulate in order to be “financially independent.” This is the magical threshold that—once crossed—means you’re technically able to live off your investment income and no longer need to Holla for a Dolla (read: work) anymore.
I imagine financial independence is a little bit like Wonka’s chocolate factory. Candy-coated withdrawals await! Dividend-flavored bubble gum!
Until we reach that point, though, it’s helpful to use the research and guidelines to help contextualize our spending as a portion of the amount of money we need to invest to be free.
Before we go any further, let’s take a moment to break down the difference (in my mind) between financial independence and financial freedom.
Financial independence vs. financial freedom
Financial independence (FI) = Wonka’s chocolate-dipped Roth IRA. Rainbows, unicorns, and funded taxable brokerage accounts. You’re free of anyone else’s clutches, baby! You’ve got enough money in the bank that you never need to work the 9-5 again! Lay in bed all day like Grandpa Joe, honey.
But there’s something that comes a lot faster—something that allows you to move freely about your life—called financial freedom.
While financial independence might mean you can retire at 35 and spend your days weaving couture magenta baskets or braiding your dog’s hair (cool!), financial freedom is the point at which “money” is no longer the #1 consideration in any given decision.
Sure, you might not be able to square-dance out of your Fortune 500 company and leave a trail of subtle-but-pointed insults in your wake just yet, but you’re no longer operating from a place of financial restriction.
Financial freedom is the point at which the clause “…but I can’t afford it” is (mostly) stricken from your vocabulary. Want to move across the country? Change jobs? Take a six-month sabbatical to learn about the aforementioned basket-weaving? Be your guest. You’ve got it like that.
Most people really overestimate how long it takes to reach that point. After all, saving between 20% and 30% of your income means you’ll have a full year’s salary saved in three to five years—and that’s assuming you’re only saving! Throw some bull market fuel on the fire and you may find yourself with a lot more, a lot sooner.
Now, let’s circle back to the broader point of this post: contextualizing our spending to help us navigate financial decisions in pursuit of freedom and independence.
Contextualizing our spending as a portion of our net worth goal
Sometimes when I explain FI math to people, their eyes start to glaze over: “It’s just 12x monthly spend and then 25x that, unless you’re more conservative in which case…” Yeah. Not exactly a contender for most interesting conversation topics when Euphoria Season Two exists.
But I theorize another reason why it tends to lose us, psychologically, is because the numbers we’re talking about seem so hard to conceptualize.
Most of us deal with dollars in the “tens of thousands” realm and only occasionally in the “hundreds of thousands” realm (like if we’re buying a home or negotiating a new high salary). Annual spending of [insert large number like $90K here] * 25?! We’re now dealing with dollars in the millions, which is—likely—a lot more money than most of us can actually fathom.
It’s hard to understand how we could go from a few thousand bucks in our savings account to a 401(k) worth $3mm. Exponential compounding defies conventional intuition. Some of us feel so discouraged by it that we just check out entirely; we assume the goal is unreachable and swipe, tap, and insert our way through town (that’s a credit card reference; get your mind out of the gutter).
But what if we reverse-engineered our FI formula to understand what a far more comprehensible amount of income requires? What each $100 we spend means for our net worth goal?
$100 per month = $1,200 per year x 25 = $30,000
And alas, there we have it—for every $100 per month that we want to spend, we’d need $30,000 invested (in a very specific type of portfolio in the stock market with between 50-75% Large Cap Stocks and 25-50% government bonds, according to Bill Bengen’s original research) to reliably produce $100 of investment income per month.
If you spend $1,000 per month, you’d reach financial independence with *checks notes* $300,000 in the bank.
In the opposite direction, for every $1 you want to spend each month, you’ll need $300 invested to produce that income. Which brings me to my point…
$100 may not seem like that much…until it is.
The intent of this exercise is to provide a better sense of what your casual spending can amount to.
Often we see examples that show “what $100 invested 20 years ago would’ve turned into.” This is the opposite. This is telling you what you’ll need 20 years from now to produce that $100.
I’d argue it’s a much more helpful way to think about your spending, because it has a direct impact on your ability to continue spending that way into your old age.
Why this might be a reality-slap in the face
For many of us, $100 comes and goes pretty easily.
Hell, I got a mani/pedi for the wedding a few months ago, and—after tip—my total was $127.50. To realize that I’d need $30,000 invested to support that monthly habit in perpetuity is a bit of a reality check on whether or not having professionally polished nails is worthwhile to me. (And technically, I’d need $38,250, since it’s more than $100. Double yikes.)
Money is meant to be spent, but it’s also a limited resource that we have to allocate wisely and intentionally.
I don’t want to encourage someone to forego all of life’s little pleasures, but it’s important to remember that—for most of us whose last names aren’t Bezos, Zuckerberg, or Musk—money is a limited resource. Allocating it wisely is key, because it represents our life’s energy.
Most of us still need to work (read: trade hours for cash) to earn and invest each incremental $30,000. And while we all likely derive varying levels of enjoyment from our work, I’d venture a guess that most of us don’t want to work forever.
Where to go from here: How much did this month cost?
Think about how much you spent last month. (Resist the temptation to explain away one-off expenses; if there’s one thing I’ve learned in life, it’s that there’s always one-off expenses, they just change month-to-month.)
If you were to live this month on repeat for the rest of your life, how much would you need to support it?
Remember, monthly spend * 12 * 25. Feeling sufficiently overwhelmed? Fantastic.
Let’s bring it back down to earth! Checking in every once in a while to make sure that you’re actually progressing toward that goal (regardless of how big or small it is) is crucial; we don’t want to be hustling in place. (The treadmill is the worst possible analogy for building wealth. Don’t exert your precious life energy to stand still.)
While it might be depressing if you’re just beginning your journey to see financial independence on the horizon so far away, keep in mind: Financial freedom is likely closer than you think.
Reaching your first six figures in investments, for example, may take a couple of years depending on how much you’re earning, what type of employer match you have (if any), and what the stock market’s doing in the short-term (jumpcut to Q1 and Q2 2022 *winces*)—but once you hit, say, $120,000, you’ve got enough money invested already to reliably produce $400 per month in income (or, more impressively, $4,800 per year).
That’s a sizable car payment! Two Equinox memberships! Fifty burrito bowls! (Damn inflation.)
If goals in the “millions” are daunting and feel unrealistic, incrementalize it: Make your goal your next $30,000, a number that’s representative of a tangible amount of monthly passive income.
You’re probably already closer than you realize to your ideal lifestyle. Mine? Grandpa Joe-style cat naps on a Wednesday, baby.
