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How Much Money Do You Need to Create Financial Freedom?

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How Much Money Do You Need to Create Financial Freedom?

Creating financial freedom using your business is a tough assignment.

There are constant obstacles along the way. However, by starting with the end in mind, knowing what the end looks like, and taking small steps every day towards it, the goal becomes achievable. You create a plan.

Before we get into the numbers you need to create financial freedom, let’s take a lesson from the South Pole. In his fantastic business book Good to Great, Jim Collins examines the example of the different strategies used by explorers Roald Amundsen and Robert Falcon Scott, in their efforts to lead teams to be the first to the South Pole in October 1911. They faced a round trip of roughly two thousand kilometres in an environment that was unforgiving. Temperatures could reach -20C even in summer.

They had no modern communication, no phones and if they ran into trouble, a rescue would have been unlikely. One leader led his team to success. The other lead his team to their deaths. One prepared for years in advance of the journey, brought in experts, collaborated with others. One did little planning.

On 15 December 1911, Amundsen and his team reached the South Pole. He and his team mates planted the Norwegian flag and headed home. More than a month later, Scott found himself staring at Amundsen’s flag. Tragically, he and his team did not make it back on the return journey.

Amundsen’s approach was simple. In his planning, he would always push his team to travel 20 miles per day. In good weather and bad. No more, no less. Planned to the degree. Scott, was haphazard with no planning.

What relevance does this have to you?

Without a plan to create financial freedom and knowing exactly what the end goal looks like, how much money you need, you are no chance of achieving this goal and being financially free. 

Let us look at a case study of clients we recently worked with: Jim and Barbara (not their real names). Jim and Barbara were business owners, in their early forties, owned a house but had few other assets. Talking with Jim and Barbara, they knew they wanted $150 000 per year after tax to live on to afford a comfortable lifestyle. Their house would be paid off in five years’ time, so they were in a position to begin their journey to financial freedom.

If Jim and Barbara wanted $150 000 of income per year, we needed to work out what amount of assets they needed to generate this income. As we looked at in my previous article, the assets you accumulate will earn you a certain level of income (rent/dividends/profit etc.) that can provide you with financial freedom if the income is high enough.

Let’s say, as a conservative guide, that we use 5% as a figure when calculating the income generated per annum; that is, the assets generate an income of 5% of their capital value. If you own a property, and that property is valued at $500 000, 5% income per annum would be $25 000. Jim and Barbara wanted to generate $150 000 per annum of income, so if we used an income figure of 5% per annum, they would need $3,000,000 of net assets to be financially free.

$150 000 divided by 5% = $3 000 000

By starting with the end in mind, Jim and Barbara now know the exact value of the assets they need to accumulate to be financially free. They know what their net wealth needs to be. They can now begin their journey.

You too can accumulate this level of assets if you start with the end in mind. You have a figure in mind; now you just need to break it down into little, achievable targets and celebrate the wins along the way.

In my next article, I’ll look at how a goal without a plan is just a dream and what you can do to make sure you achieve your financial goals.

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