The path to reaching financial freedom is to build enough wealth to produce enough income so that you no longer have to work to provide for all your needs. On this episode of Getting Money Right, we break down a few key wealth indicators that you can use to ensure you reach your own financial independence.
Today we’re going to talk about some “indicators,” some numbers that help you understand the path to wealth.
Rate of Return
4% Percent Rule
1. Crossover Point: when your investment earns more money for you than you’re saving each month.
At 5% rate of return your yearly invested amount grows as follows:
Year 1 - 5% of invested amount.
Year 5 - 1/3rd of invested amount.
Year 8 - 50% of invested amount.
Year 13 - crossover point - 100% of invested amount.
Year 23 - 200% of invested amount.
Year 30 - 300% of invested amount.
Year 35 - 400% of invested amount.
If you start investing at 25 crossover will happen at 38.
If you start investing at 35 crossover will happen at 48.
Starting early matters
Instead of trying to define Financial Independence is terms of a large number, you can be more quality of life focused, knowing these numbers can help you plan your life and make decisions to improve the quality of your life and others around you.
One Definition of Financial Independence is when your investments make enough to cover all your expenses, which means you no longer need to earn an income through labor.
Living comfortably and doing what I want with my time without concern about how much income I earn.
Safe, steady income for life from a source other than a job.
The state of having sufficient personal wealth to live indefinitely without having to work actively for basic necessities.
2. Savings Rate: the amount of increase your investment will have over a specific length of time.
Assuming you earn 5% on your investments.
Two major ways to boost your savings rate:
3. Rate of Return
5% Rate of Return @ 10% Savings Rate = 51 years to retire
10% Rate of Return @ 10% Savings Rate = 33 years to retire
5% Rate of Return @ 15% Savings Rate = 43 years to retire
10% Rate of Return @ 15% Savings Rate = 28 years to retire
5% Rate of Return @ 25% Savings Rate = 32 years to retire
10% Rate of Return @ 25% Savings Rate = 22 years to retire
4. 4% Rule
Trinity University study found 4% to be a very safe withdrawal rate. As long as you're diversified and investing well in retirement, it should last 30 years.
4% of ½ Million would be $20,000 a year
4% of 1 Million would be $40,000 a year
4% of 1.5 Million would be $60,000 a year
This doesn’t take inflation into account, along with a few other factors. But, if you’re looking for some simple numbers to know what your savings target should be, this is a good place to start.
Other Investment Options
Your saving can be used to invest in other types of investments that will grow your passive income until it surpasses your regular income.
Creating a business or product.
Real-estate, a business, and other types of investing could allow you to generate income very quickly to replaces your regular income, grow wealth, and be more generous with your resource and/or your time.