The “Freedom Formula” Is…

Let’s start with the end goal in sight. We need to know what we’re aiming for before we shoot for it.

Happy Ever After, right?

Yes, but we’re aiming for the financial independence that can make us “Happy Ever After” first, and there’s a simple formula for financial independence that we call the “Freedom Formula”.

The Freedom Formula is how much money you need to never have to work again. If you have this much money, that’s it. No more working for money. No more nine to five. No more putting up with the boss.

Yes, some people have a ruder phrase for this, but we call it the “Freedom Formula”.

And it’s twenty five times your spending.

25X…

That’s it. You need to earn, save and invest (notice I didn’t say “beg, borrow and steal” – none of those work!) twenty five times what you spend every year, and then you are free.

This includes your house (if it doesn’t have a mortgage). This includes your pension. This includes your emergency savings.

If you can gather together 25X your spending, you can be free, and Happy Ever After could be yours.

…YOUR SPENDING

Now this is where the really magic part of the Freedom Formula kicks in. We’re not talking about saving 25X your salary, or anything like it.

Forget about your salary and all other forms of your income. You need twenty five times your spending. The less you can spend every year, the lower your target of 25X will be. If you didn’t need any money at all, you’d need 25 times nothing. If you need a very little, then you need 25 times a very little. If you need to spend a lot, then you’ll need twenty five times a lot.

But don’t need a lot.

One, you don’t need a lot. You need a little.

Two, it’s better for you to need a little, and it’s better for the world that you need a little not a lot. You will be happier that way.

Three, the income you don’t spend, you will save, so you will race ahead to your target of 25X even faster. You will have lowered your target and increased your savings rate, and you will get there twice as fast.

(Says who?)

Maybe you just stumbled on this website, and you’ve never heard these numbers before. Maybe you don’t trust 25X, and maybe you don’t think it’s possible to save that much.

I got that number from three sources.

The “FIRE brigade” (as I think of them), who work to be Financially Independent and Retire Early. They target owning 25X their spending as quickly as they can, so they can enjoy the rest of their lives.
The world’s biggest endowments, charity funds designed to keep giving out money to worthy causes forever, donate 4% of their assets every year. That means they manage funds that are twenty five times their yearly spending…

I read the number on the Internet, courtesy of Mr Money Mustache I suspect, at about the same time I heard it from the Rockefeller Foundation. If two such totally different sources are coming back with the same number, it’s probably right, although I think you should check out their pictures…

(In case you’re a little confused John D Rockefeller is the fellow on the left and Mr Money Mustache is on the right, but yes, they may be related by more than just formulas!)

It Adds Up

The numbers also make sense though.

If you invest reasonably well, you should be able to make a long-term return of somewhere around 8 to 9%.

Some people will tell you they (and you) can do better than that, and make above 10% regularly. They might be able to, and so might you, but the key word there is might so let’s not assume that.

Some people will tell you that 8 to 9% isn’t possible, because you can only get 1 or 2% in the bank. Don’t believe them either. Not because they’re wrong about banks, but because putting money in the bank isn’t investing, it’s saving. Investing is doing other things, and you should definitely be able to get above 5% from investing.

But let’s be safe, and say you can get 7% average return over the long term. Can’t you take all of that? Well you could, but then you wouldn’t be factoring in inflation. Your cost of living will probably increase by about 3% every year, just because… so if you take 4% out of a 7% return, you’ll have 3% to cover for the cost of inflation.

Like I said, the numbers make sense. 7% return minus 3% inflation equals 4% to spend.

And if you want to spend 4%, you need 25X – because 25 x 4% is 1.

If you don’t want to think about investment returns yet, think of this like being the landlord of a house. If you rent the property, you get income. You can live on that. The house will hopefully also go up in value, covering for your cost of inflation.

We Did Say ~Ever After!

And this should last you for ever. Depending on taxes, your kids should have some when you’re gone too.

The key is that you don’t run down your portfolio. By removing an amount less than your investment return, the absolute amount never goes down. By removing less than your investment return after inflation, what those evil sorcerers called economists call the “real” value of your portfolio never goes down either.

And so you can continue to live on it for ever… Happy Ever After!

(This is your MISSION.)