***Photo taken at the Bunkers in Barcelona, Spain***
Well I am glad you asked. Financial independence, early retirement, f*ck you money, or whatever you want to call it is not really a new thing. That being said, a majority of the population has yet to hear of it. Case in point. I was having dinner with a friend and figured I would toss the concept out there. Their response, “so you just want to save up a lot of cash so you can do nothing all day?”.
Being financially independent doesn’t mean a life of “doing nothing”. Nor does it mean saving a stock pile cash in a proverbial mattress. It is actually the exact opposite. It is the freedom to do whatever, whenever, you want. I am getting ahead of myself…
Financial independence is simply the point where you have amassed enough assets to pay for your ongoing and future living expenses. For example, lets say you live on $40,000 a year after taxes. This covers your house, car payment (another post all together), food, entertainment, shopping, and well you get the picture.
Now imagine a magic genie decides at the beginning of ever year, until you kick the bucket, to deposit $40,000 into your banking account. Congrats, you’re now financially independent (minus that pesky thing called inflation…more on that later). All your needs are met by this magical deposit and you, therefore, no longer HAVE to go to work. You can now CHOOSE to work where you want, when you want, on what you want, if you want. The power of choice is well, powerful.
Now in the real world, we don’t have magic genies that deposit money into our accounts. If you find one, feel free to send it my way. We can, however, amass enough income producing assets to generate said $40,000 a year. What are these magical assets I speak of? Well here are just a few examples.
- stocks
- bonds
- commodities
- residential property
- commercial property
- REITs
- your mind (think books, music, art, courses, and etc.)
- and the list goes on…
The next logical question is how much do I need to generate the hypothetical $40,000 a year? Well that depends on your mix of assets. The general rule of thumb is you need 25 times your annual expenses. So some basic math tells us we need a cool 1 MILLION dollars to generate $40,000 a year while we sit back and drink mojitos on the beach.
Hold on! Did you just say 1 MILLION dollars (insert Dr. Evil laugh here)?!? Yeah, I did. I never said this would be easy. The good thing is there are tips, tricks (not the magic kind), and tools to get you on the right path.
Food for thought. If you can live on $30,000 a year, then the total drops to $750,000. What about $25,000 a year? Well then sock away $625,000 and you’re good to go. If you require 0 dollars a year, congrats! You have already reached FI! Find the basic formula below. Try it out and see how much you need to gain your freedom.
x * 25 = FI where x = total annual expenses after tax