Today, I'm going to explain how to calculate how much money you need for financial freedom.

This simple calculation provides a target. It is something to measure your progress by.

In the bestseller "Atomic Habits", James Clear states: “One of the most motivating things is seeing proof of our progress." This is why measurement is so critical for effective goal setting.

Most people fail because they try to achieve a long-term goal with willpower alone. The human brain loves instant gratification. It's why the allure of procrastination is so strong. Having a goal to measure your progress against gives you little hits of dopamine which encourages behaviour that benefits you tomorrow.

Save 25x your annual spend for financial freedom.

This calculation is from the Trinity Study. Researchers showed that, with a balanced portfolio, you could've withdrawn 4% of your invested wealth and never run out of money.

If you have £800,000 invested, you can withdraw £32k (4% of £800k) in the first year. For every year after, you adjust £32k by inflation.

Calculate your yearly expenditure:

To know how much you need invested, you first need to know how much you spend.

There are loads of tools that can help you do this. But the easiest method is.

1. Download last year’s transactions from your main bank account.

2. Remove any income you earned. But, keep any reimbursements from friends or family for splitting bills.

3. Remove any transfer of funds. For example, if you paid into an investment account. But DO keep all credit card & mortgage payments.

4. Sum up all your outgoings and subtract all your incomings.

5. Make any adjustments that are specific to you.

My expenditure last year:

I spent £22k last year after I removed £10k of spend converting a van to a camper van because this is unusual expenditure. It is building an asset on which I will recover the money when we sell it.

Despite only spending £22k last year I still managed to holiday in Colombia, attend Glastonbury festival, never miss a social event due to finances and indulge in many other luxurious activities.

As my life progresses, my ideal expenditure is £30k per year. As a family, it might be £50k - £60k.

Set your target:

We need to multiply our yearly expenditure by 25 to calculate our target. With this amount invested, we can consider ourselves financially independent.

So, for me, I multiply £30k by 25. I need £750k invested to achieve full financial independence.

How can anyone reach £750k?!

The number sounds scary at first. And it is in the short term. But, with compounding growth and long-term behavior, it is possible faster than you might think.

Below I have laid out two paths to financial independence. One is a graduate who hates their very well-paid job. The other is a happy employee earning the UK average wage.

The graduate:

Let’s assume a 22-year-old has left university with no money and a student loan but has secured a well-paid job. Let's call her Lucy.

Lucy's starting salary is £45k. In the UK, it provides £34k after tax and student loan repayments.

Lucy was smart. She shared a flat with friends and continued to use tricks learned at university to avoid paying for expensive drinks in bars. She only spent £19k in her first year and invested £15k into a passive index tracker. 

Lucy doesn’t love her job, but she is a good worker. She's climbed the career ladder and received the associated pay rises. By 32, she has paid off her student loan, she is earning £150k per year (£91k after tax) and spending £33k per year.

Meanwhile, she's invested her savings each year and it's grown at the S&P500 average of 10.8% per year.

The result?

She's reached £750k after 11 years of work. At 32, she can march into her manager’s office, hand in her notice, and announce that she will never work another day in her life.

Now, yes. I've made a lot of assumptions. Not least, the very attractive salary that Lucy has achieved. I am 32 and I have seen many of my friends achieve this kind of salary growth, so I know it is possible. But I also know it isn’t the average.

The happy employee:

Let’s instead use the average UK salary by age according to the Office for National Statistics and graph something similar. (See the appendix for the average salary pre- and post-tax).

This time, Ben, our financially-free individual started work at 18. Ben was still living at home, so he only spent £5k and saved a whopping £14k in his first year. He moved out at 20 and shared a flat with friends. They weren’t living in London, so rent was far more affordable. He averaged £12k of spend per year until the age of 22. It rose to £14.5k at 22 and increased each year until it plateaued at £20k at the age of 30.

Luckily, Ben quite enjoyed his career and left the office at 5 on the dot and never worked weekends. He enjoyed life outside of his job and when he looked at his investment portfolio at the age of 37, he had a nice surprise. His money had also grown at an average 10.8% each year and was now sitting at £750k. 

With his ‘f*ck you’ money he now has an envious number of options. He can carry on working in the career he enjoys and build his nest egg even bigger, all the while increasing his yearly spend. Or, he could reduce his hours and spend more time pursuing his interests outside of work. He could even take the same path as Lucy and never work another day again.

Of course, both of these examples are stories.

They contain a huge number of assumptions so I can neatly graph the trajectory of their wealth. But they provide an idea of what's possible. Your life will contain many more idiosyncrasies than I can include in 3 paragraphs but there are broad lessons that can help you decide how you want to live your life.

I chose to begin my career in the high-paying world of finance before quickly realising it wasn’t for me. Luckily, I had already read the legendary Mr Money Mustache blog and invested a very large proportion of that income. I then spent a few years running a business with my friends. It paid a below average wage but gave me the motivation to share a one bed flat with BOTH of my cofounders reducing my expenses for a little while! Along the way I received some inheritance and got a small windfall from selling one of our businesses. I didn’t want to spend 11 years in a career I didn’t enjoy like Lucy and have instead taken a meandering path toward financial freedom.

I am not at my magic ‘f*ck you’ number. But, the money I have accumulated, plus my low yearly spend, provides the confidence to take risks in my career and go without an income for periods of time.

You will have your own way of doing things. But, by spending on things that bring genuine happiness and investing your surplus, you too can achieve a semblance of financial freedom far sooner than the average retirement age of 65.

If you have any questions feel free to hit reply. And if you know anyone that would find this helpful please share it far and wide. You can either forward this email or hit one of the ‘social’ buttons at the top of the email to share it to your preferred social media platform.

Appendix:

If you would like to calculate your expected wealth growth based on your own yearly salary and spend you can use the Google Sheet below. I have populated it with the average S&P500 growth of 10.8% but you can change any of the green cells. Of course, historical performance is never a guarantee of future performance but it can provide a guide for what’s possible with the power of compounding growth.

Estimate your wealth growth here.

The Average UK Salary by Age according to the ONS: