For some people, financial independence means the ability to live entirely on our passive income or investment income. This basically means that you have complete freedom to decide what to do with your time, because money is not an obstacle. If you want, you can work, but you don't need to, because even if you don't work, your investment can guarantee the maintenance of your standard of living. In fact, financial independence is usually related to:
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- Average / low monthly cost
- Investments with sufficient return to cover these monthly expenses
- So, how to calculate the amount needed to achieve financial independence, that is, how much wealth you should have enough to live without working?
1- Calculate your monthly expenses
The calculation of monthly expenses is the first step to arrive at the value of financial independence. Do not make estimates, you must have an accurate and realistic value. If you still don't know how much you spend each month, get a free "what to save" tool to help you complete this task. Consider whether your spending today reflects the lifestyle you want in the future. For example, if you don't have children, but want to have children, you must add at least 10% to your estimated monthly expenses. On the other hand, if you live in a big city today and pay a lot of rent, but in a few years you want to move to a quieter and cheaper place, you can also consider this in your account to reduce the estimated monthly cost.
The ideal method is to calculate your monthly expenses today and make only small adjustments, mainly to increase expenses (reduction is not recommended). Imagine that today you spend 800 euros a month, but expect to spend more in the future. You can consider 1,000 as the acceptable value for the estimated monthly cost.
2- Multiply your monthly expenses by 300
If your estimated monthly expenditure is 1,000, the amount you must invest is 300,000 euros (1,000 x 300). I don't want to go into technical details about this amount, but this formula assumes that you will have a 4% return on investment (adjusted for inflation). In this case, if you invest 300,000 euros and receive 4% per year, it means that you receive 12,000 euros per year (4% x 300,000), that is, 1,000 euros per month, which becomes the amount of expenses you define. In this way, you can guarantee that the investment income of 300,000 euros covers your monthly expenses.
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Total financial independence = monthly expenses X 300
That's it, you have the value of financial independence. Simple, isn't it? I think for most of you, the estimate seems completely out of reach! This is normal and will undoubtedly be a challenge for most of us, and will involve many sacrifices or impossibilities. First of all, I would like to remind you that to have 300,000 euros it is not necessary to save 300,000 euros, but much less! By investing, you can grow your money over time, so you will have to save much smaller amounts. If you have nothing now and expect to have a wealth of 300,000 euros in 20 years, then, if you invest and save, you will have to save less than 150,000 euros in total!
Second, you don't have to be completely independent of finances! If you can create passive income to cover half of your monthly expenses, it has already had a huge positive impact on your life and freedom. In this specific example, that means investing 150,000 euros. In that case, you can decide to do a part-time job, switch to a lower-paid job of your own, start your own business more safely, and so on. I hope I have understood the value needed to achieve financial independence and why it is not necessary to reach that value to live more freely. I wish you all the best in your journey of financial growth and passive income generation!
I hope to see you soon :)