What is financial independence? Financial independence means having enough money that you never have to work again if you don’t want to work. That is how you will think about it at first, anyway. You have worked so hard to get out of debt and save for your dreams that not working for a while sounds really nice. When you first reach financial independence, you are very likely to spend a little while not working, vacationing and checking off your bucket list. But eventually, as Tim Ferriss notes in the Four-Hour Workweek, you get bored and existential questions drive you back to some kind of “work”. It just won’t feel like work. And it may not be paid. In fact you might pay to do it.
But before we go down that rabbit hole, let’s define financial independence in the way that you, in your post-delirium state, will eventually settle on defining it. Financial independence is a number. It is a measure of your net worth. And that magic net worth number is the number at which you can live off of your money for the rest of your life, doing all the things you love to do, no matter long medical science allows you to live. This number is different for everyone, because different people prefer different lifestyles, and because different people prefer different types of investments for all that net worth.
So what is YOUR number? To calculate your magic number, you start by daydreaming about your ideal lifestyle. You could live anywhere in the whole world. Where do you want to live? Maybe you have a dream location, or maybe you want to be a full time nomad, and live in a new palace every month. Or maybe you want to be semi-nomadic and live in a specific set of 2-4 places that you rotate through… winter in one place, summer in another. What kind of housing do you want? Do you want a house or an apartment or an RV? How do you want your day to go? What do you do with your time? How often do want to eat out versus cook at home? There are no rules here.
Design the life you want and figure out what it would cost for a year of that lifestyle. Take that number and multiply it by 25. THAT is your magic number. Why? It’s an old rule of thumb, but a good one to start with. Many years ago, many smart people calculated that you could take 4% of your net worth each year to live on, and even in the worst of all stock market scenarios, you would never run out of money. You could argue that, if investments are doing well then you could take more. But that discussion is better left between you and your financial manager.
So if you need $5,000 per month to live happily, that is $60,000 per year. $60,000 times 25 is $1,500,000 (1.5 million). These numbers sound unachievable, until you get there. Then they still sound huge, and fun, and not quite real, and awesome.
So you can see that the less you need per month to enjoy life, the smaller that magic number is and the easier and faster it becomes to achieve it.
