The Calculation
There are multiple different approaches to calculating how much capital is needed to be financially free. We will focus on one way below. To be financially free without having to work this statement has to hold true:
Total Passive Income > Total Expenses
To achieve this goal you need:
- A positive cash flow
- Invest the surplus
- Maximise your asset returns
To give you a feeling for the numbers look at the example below:
Assets: 1 million
Return: 8% per year
Calculation:
Yearly: 1.000.000 x 0.08 = 80.000
Monthly: 80.000 / 12 = 6.667
Should you manage to get an annual return of 8% on your portfolio you can see that every 1 million in assets returns 6.667 per month.
If your monthly expenses for example equate to 33.335 per month then you would require 33.335 / 6.667 = 5 million in assets
Please note that tax is not taken into account here! It is just to get the concept of the calculation.
To achieve financial freedom faster three numbers can be worked on:
- Increase Asset base
- Increase % return on the assets
- Reduce expenses
In the end it boils down to what you want. Is it more important for you to keep up with the Jones’ and have a big house, fancy car and expensive clothes and work an extra few years or are you willing to scale down on those items and be financially free sooner and enjoy a stress free life? The choice is yours!
