What does the term financial freedom and independence mean and how can a calculator help? There are several ways to perform a calculation for different use cases. Do you want to have a rough overview or do you really want to plan? Both are quite easy to do and I will show you how it works.
How much money do you need to live?
This question is very difficult to answer. It always depends on what is important to you in life. For some it is the financial freedom to be able to live in luxury. Many are happy if they can stop working at the age of 50. Others love their job and just want a little more security in their life. It’s all up to you and your personal life planning. You have to decide for yourself what is important to you and how much money you need for it.
In addition to the financial aspect, however, you should not neglect your own well-being. Your health should be mentioned first and foremost. But also your family and friends have a very important meaning. But the most important thing is your joie de vivre and that you are happy yourself should always be in the first place. If you need more freedom to do this, then you should start putting money aside.
Design your life the way it suits you, not the way society expects or thinks is right. Working 40 hours a week until the age of 67 is outdated nowadays. This is a very old model and we should not stick to it but take control of our lives. You can work from anywhere in the world, be it in a country or city you like. It is also conceivable to travel around the world as a digital nomad, for example. The possibilities are almost limitless these days.
In 5 steps to financial freedom
Freedom is very important for many people and is already enshrined in the 2nd article of the Constitution in Germany. “Everyone has the right to life and physical integrity. The freedom of the person is inviolable.” But when it comes to money, most people don’t have financial freedom, they are dependent. You are either dependent on someone or you spend more money than you earn.
In the following five steps, I would like to explain to you how you can plan your finances. These points are only so defined by us and you decide for yourself what your personal wishes are. Not for everyone the last point is achievable and that is not really important. Set a realistic goal and then you will be happy in the end and get the degree of freedom you want.
1. Financial Dependence
At the beginning of our lives, we start out in complete financial dependence. You are not yet able to earn your own living. Even at an advanced age, many people feel that “there is still so much money left over at the end of the month”. You are thus completely financially dependent and have no freedom whatsoever, as you always have to look to raise enough money to cover your running costs.
If you want to create your way towards independence, then you need to generate more income than you have expenses. The best way to do this is to keep a budget book in Excel.
2. Financial Cushion
Should you manage to do that, the first goal would be to save a financial cushion. The financial cushion is intended for emergencies, if you have unexpected expenses or lose your job. It will help you avoid cash shortages, have money on your hands at all times and help you sleep a little better at night. If you have put back the financial cushion, then have already achieved a certain freedom.
Your reserve should cover your monthly expenses for about six months. It is best to invest this money so that you can access it quickly. Take a look at our account system for this, it can be very helpful.
3. Financial Security
With your reserves, you have taken the first step towards financial freedom. Now it is a matter of continuing to generate a surplus income. This money will then not be placed in a daily cash account, but you must now start to invest your profits. For this purpose there are the most diverse financial investments. It all depends on you and what risk you want to take. It depends on you whether you want to invest in stocks, bonds, ETFs, funds, real estate, gold, commodities, cryptocurrencies, P2P loans or a mix of everything.
Here the goal should be that you can live off the passive income from your investments if you limit yourself a lot and spend only what is necessary. Imagine living at a student level or on a very low budget.
4. Financial Independence
Thus, you have already achieved basic security. The next step is financial independence. This goal should be easily achievable if you save well and invest properly. Trust in the compound interest effect and increase your money additionally. To achieve financial independence, you need to save enough money to maintain your current lifestyle or to enjoy life without restrictions. Perhaps it should be even a little more so that you are truly financially independent.
Now you can decide if you want to continue working or maybe just stop working and go on a trip around the world. Maybe you still enjoy your work so much and work only 3 days a week. You are free to do what you always wanted to do.
5. Financial Freedom
It is much more difficult to achieve financial freedom. Here you need to accumulate several million Dollars in assets to fulfill your goals and dreams. If you want a second house by the sea, a luxury yacht, expensive trips or a very costly house with a pool and a lot of land, then this is very expensive. To achieve this level of freedom and then not have to work, you need to save a lot and invest wisely.
But there are plenty of examples these days of people being able to do that on their own. As a YouTuber, influencer or founder of a startup, you have the best chance of doing so. But you also have to be willing to take risks and become self-employed or start a company. As an employee, it will not be possible to achieve this degree of financial freedom.
The 4 Percent Rule or only 2 or 3 Percent?
The 4 percent rule is widespread among frugalists and is also becoming increasingly popular elsewhere. More and more people are looking into the possibility of retiring earlier and inevitably come across the 4 percent rule. It goes back to the Trinity Study, which was published in 1995 and then revised again in 2009.
However, there is also justified criticism of the 4 percent rule. On the one hand, the simplicity with which financial freedom is calculated here is criticized. On the other hand, it was assumed that the money would only last for 30 years. But if you now want to retire at 40, this period is too short. The portfolio with 50% stocks and 50% bonds was also criticized many times.
If we take all the points of criticism together, then the 4 percent figure is not tenable in my opinion. In order to obtain a more realistic figure, we propose to calculate with 3 percent or even less.
But how does this rule actually work? This is relatively simple. You determine how much your annual expenses should be at the time of your retirement. Then multiply this value by a factor. With the 4 percent rule, this is 100/4 = 25. If you want to use the 3 percent rule, then the factor would be 100/3 = 33.3.
Now let’s look again at the above 5 steps to financial freedom and fill in numbers there to see how much money we would need to save up.
| annual costs | Factor | Savings | |
|---|---|---|---|
| Financial Security | 30,000 Dollar | 33,3 | 1,000,000 Dollar |
| Fin. Independence | 60,000 Dollar | 33,3 | 2,000,000 Dollar |
| Financial Freedom | 240,000 Dollar | 33,3 | 8,000,000 Dollar |
Does a simple financial freedom calculator make sense?
I think life is much too complicated to be able to map it with a very simple calculator. Entering your desired net income, return, savings amount, age, retirement age and current assets is not nearly enough to plan our lives with. Even applying the 4 percent rule is far too inaccurate as a calculator. It can be used as a guideline to how much wealth we need for financial freedom or financial security, but that’s about it.
Our life is not linear and our desired expenses will always change. There are many different factors for this, such as:
- Founding a family
- Move to another city / country
- Buying a house
- Changed standard of living
- Divorce
The same applies to our income and our savings amount. You change jobs and earn 30% more all at once and can then also save more each month. Or you decide to work only half-time and earn correspondingly less and have to adjust your savings rate again.
Also the consideration of your pension, 401 (k) plan, life insurance and other income such as rental and leasing are not recorded. In addition, you cannot include inheritances, gifts, or even expenses for cars, longer vacations, or anything else.
The 4 percent rule or a financial freedom calculator are good to deal with the topic of investments, an account system and your life planning. This is also very important and will help you a lot in the future. However, these calculation methods are ultimately too inaccurate to be able to map a life that is not only linear.
This is what you should do!
First and foremost, you need to think about what you want to achieve in your life. On the one hand financially and on the other hand also in the private area. However, both are so interconnected that you should not only take care of one, but always both.
What good is it if you have achieved financial freedom but drop dead at 45 because you have always worked too much. Or you are totally rich, but totally unhappy and severely depressed.
Maybe you’ve started a great family, but can’t realize your dream of owning your own home. Instead, you live cramped with five people in a 700 square feet small apartment and cannot afford to go on vacation.
If you want to achieve your dreams and desires, discipline and perseverance are definitely required, because “You can’t make something out of nothing”. You must first be clear about what you want and figure out how to make it happen. This concerns first your own well-being, which should always come first. After that comes the family, as you can recharge your batteries there. Only then is it about the financial aspects.
In addition, you will probably have to change your habits so that you can achieve your goals. This starts with daily routines such as sports, so that you have more strength and stamina. Also, you need to think about whether you can save more money, if necessary, so that you can get closer to your dreams. Furthermore, you should take a close look at how you invest your money and learn to deal with it when the stock prices or the price of Bitcoin also go down sometimes.
Your life is thus characterized by constant learning and change, and that’s a good thing. Stay active and look forward to the new challenges instead of burying your head in the sand. Do not shy away from it, but be open to change, because only in this way you will continue to grow.
Our Guideline!
Here is our recommendation on how you can start planning your life and finances. This is only our suggestion and it does not necessarily have to be right for you. Understand these points as a guideline on the way to achieve your goals and dreams.
- Find out what is important to you and brings you joy
- Make a life planning
- Create a vision board
- Start the day well with a morning routine
- Set smart goals with small intermediate goals
- Use a budget book
- Organize your finances with an account system
- Automate your money management
- Learn for a lifetime
- Achieve your dreams and desires
GELVOS was created with the idea of how to implement “earn money without stress” and for this I would like to give you our experience again. All articles on this page are divided into these sections: make. save. invest. live. If you don’t want to miss anything, subscribe to our free newsletter and get a big step closer to your goals!
This article is not an investment advice, it is only our personal opinion. We report here only on our personal experiences and findings as private investors. Thus, my texts serve solely to impart knowledge and do not constitute an invitation to buy or sell investment products. For further information please refer to the disclaimer.