This article could have been short. I was tempted to repeat the title and make that the whole post. However, I can do better than that.
Imagine a scenario where your money didn’t compound anymore. Perhaps you took it all out and put it under your mattress. (Note: Please don’t do this.) It’s an unlikely scenario, as there are cases where you’d at least earn interest. Then again, banks paid very little interest for a couple of decades.
How many days of financial freedom can you purchase with your savings?
Here’s how I calculated our number:
Lazy Man’s Financial Freedom Days
The first step is to calculate your expenses. I’ve done this a few times. A couple of years, I pegged it around $100,000 a year. I recently did a similar expenses exercise here. The second one came out to $75,000 but didn’t include the $25,000 we spend on the kids’ private school. It’s good that the math worked out close to the same in both scenarios. I don’t budget or watch every dollar – I try to make good financial decisions. It’s worked well for me.
Our expenses may be more than $100,000 because these estimates are primarily for our necessities. However, we only spend a little money on other stuff. It’s very clean to work with the $100,000 number.
The $100,000 is accurate for the next five years. At that time, we pay off our 15-year mortgage, and the kids are in (potentially free) high school. That brings the expenses to around $50,000. To make things easy, I’ll use these numbers going forward.
We’ll probably have some college expenses, but those are impossible to plan. My wife’s GI Bill can fully fund one child attending a state school (or partially fund a private school). Since we have two kids, that’s half of the plan. They will hopefully get some scholarships as they get top grades in the private school. Finally, we have a couple of rental properties, and that income would likely offset the expenses there. For this exercise, I’ll ignore the ballooning cost of college and figure something there will work out. We do have some 529 savings, but it could be better. (Hey, spending $25,000 a year is already a lot of money.)
The beauty of this calculation is that there are no rules. No one is checking your work. It should work out fine as long as you are consistent over time.
Now that I’ve established my expenses ($100,000 for the next five years, $50,000 after that), it’s time to look at how much money we have.
Fortunately, I update my net worth every month, making this calculation easier. Our liquid cash and investments roughly add up to around $1,750,000. Some of these investments are in retirement accounts, which would have tax consequences. Since I’m estimating, I’ll lower the number to $1,500,000 to account for that.
I expected to use a calculator, but the math here is elementary. If we allocate $500,000 for the first five years, we have a million going forward. A million dollars will last 20 years at the $50,000 annual expense rate. Five years plus twenty years is 25 years. My wife and I would be age 71. That’s very, very good.
Having 25 years of financial freedom is nice, but we have more than that. The rental properties that I mentioned before will help. Also, my wife’s pension will be more than $50,000 in annual expenses. I don’t intend to stop working, and there will be some kind of Social Security around. Finally, we’ll let the investments grow, not stuff the money under the mattress.
At first, I wondered if this idea was useful. It won’t mean too much to us for all the reasons I mentioned in the previous paragraph. It’s nice validation, but it isn’t actionable. I take that back. I think that we can spend more now. It also motivates me to optimize my health to enjoy the money much longer.
However, it is perhaps much more motivating for younger, newer savers/investors. The amount of financial freedom may seem low, like a few months, but if you are saving and investing, it will grow. Watching this number grow will undoubtedly help one feel better and encourage them to save and invest even more.
It becomes less valuable as those savings and investments grow. I’ve been preparing this for a long time, and everything went well. If you are a long-time investor, perhaps you find yourself in a similar place. We’re all on different parts of our money journey, so use whichever tools that work to motivate you.
When I was younger, financial freedom meant manageable debt that could be paid as long as you still had income. I don’t remember FIRE type discussions. Hopefully college kids are thinking about this before they make decisions about marriage, kids, house, etc. because once the snowball starts rolling down the hill it’s hard to change course.
That’s a nice thought exercise, we’ve got over a hundred years of freedom using your method. And considering we are in our late sixties already I kind of think that might be enough! But a lot of that is because we will soon be taking Social Security and at nearly $75K a year that will cover most of what we spend. Ironically, the less time you’ve got until your expiration date the more years of financial freedom pile up in the bank.