The magic number: How much you need for financial freedom
Can you achieve financial freedom in the next 25 years?
by Angus Kidman
Financial freedom: It's the ultimate goal of every budget.
Central to financial freedom is the magic number: The amount you'll need to have saved so you can pay for all your lifestyle expenses without having to work.
That leaves you free to travel, relax or work on something you really enjoy and value.
Obviously, everyone's needs will differ, but we can use real-world data to help you figure out your magic number.
Calculating your magic number
The average Australian household typically spends $1,425 a week on expenses, according to the Australian Bureau of Statistics.
So as a baseline, you'll want to be earning $1,425 a week from your investments, or around $5,700 each month.
Sounds high, right? And yep, that would require a lot of money in the bank.
Plugging into a savings calculator, to earn $1,425 a week in a savings account with a lazy-but-still-ambitious 2% annual interest, you'd need around $3.7 million in cash.
That's a good ballpark estimate of your magic number. Call it $4 million if you want a stretch goal.
Again, your own exact number will differ. You can work out whether your own monthly expenses are higher or lower than the Australian average of $5,700 by checking out Spending this month in the Finder app to see what you're spending. (You'll need your bank accounts connected for that to work.)
But whatever your number is, is it possible to get there? Let's crunch some more figures.
How to get there
Those average weekly expenses add up to $74,100 over a year.
The typical household earns $119,850 a year, according to Finder's Consumer Sentiment Tracker, which leaves just over $45,000 spare. (Remember, it's a household figure, so more than one salary might be included.)
Let's be super-conservative and assume that there's actually $30,000 that your household can set aside for savings and investments to build your path to freedom.
How much would that be worth in 25 years?
Sticking with our example of a 2% savings account, at the end of 25 years, you'd have just over $972,000.
As we've seen, that's only a quarter of what you'll need.
To guarantee financial freedom, you'll need a rate of return that's closer to 10% per year. That won't happen with a savings account, but it is possible if you invest more strategically.
Let's get started!
Remember, these are baseline figures. You'll also have a large pool of superannuation to draw on (especially as contributions rise, and it's likely that your house will have risen in value over that time too.
But to achieve freedom, you'll absolutely need to do more than rely on just those.
So now you know the goal. How can you get going?
Here are 3 starter tips:
- Commit to a regular savings plan. If you spend every cent you earn, you'll never be free. Struggling to save? We can help with that.)
- Diversify your investments. Basic savings accounts aren't going to offer a 10% return any time soon. You'll want a mixture of options, potentially including shares, cryptocurrency and property, to achieve that goal.
- Keep your goal in sight. Reaching freedom doesn't mean you have to live on 2-minute noodles and never go on holidays. But it does require discipline and commitment. Remember the ultimate aim: Living well without having to work. Let's get wealthy!