Step 3: Figure out how much you will need
This third step to financial independence is one of the most important, because if you don’t know how much you will need then you don’t know when you can actually stop working and enjoy your lifestyle and independence.
One of my cousins works in finance. He has three kids and a great lifestyle, including a big house, cars and private schools. They holiday abroad and never skimp on anything. Yet, he is not a big spender, and he was always saying that by age 40 he could retire and live on his investments. He is never going to do it, because he is hyperactive, and because he inflated his lifestyle and needs more money now than when he made that plan.
So the question is, how much do you need to live per month? I made the projection for myself. One where I try to live a simple life, in the countryside, in a paid for house. Fixer-uppers are really cheap in rural France, I could find a house for about $50,000 and start working on it, grow a garden, and need about $1,000 per month to live. In this case, I would need $50,000 for the house plus $750,000 for my living expenses. I figured I should have enough to live until I am 95, at $1,000 per month.
Or, I could generate those $1,000 a month through rental income or investments. My calculations aren’t entirely true either because in France you get about $500 from the government when you retire, and free healthcare etc. But I may live abroad and not get all of that.
Now $1,000 is pretty easy to generate. I actually have a rental property that will give me this amount once my loan is paid (I took an extra loan on top of the mortgage), and it will give me more after 28 years when my mortgage is paid too.
I would also like an emergency fund of 2-3 years living expenses, that is $30,000. I would tap into it for real emergencies, like health or big repairs on the house, and if my plan fails, I would use it to live until I go back to work. Hoping that will never happen though!
The good thing is I am almost set with my rental property. If I were to have that money in savings, at a conservative 4% growth on my investments, I would probably withdraw 2% a year to adjust for inflation and save for emergencies the other 2%, so I would need $600,000. I don’t have that in the bank. So I will continue to look for ways to make passive income out of what I already have and new ideas.
How much YOU will need to live comfortably for the rest of your life might be much more, or much less than I do. This guy Jacob from Early Retirement Extreme lives on $7,000 a year, including health insurance in the US, but as his blog says, he is Extreme.
You may have kids, colleges to fund, or a partner who is not willing to live in a smaller house in the countryside. Still, run your numbers. You may be surprised how low they can be.
With a job, I couldn’t live on $1,000 a month. I’d have to dress well, probably have a car to go to work, fill the tank, get out with colleagues or get them gifts sometimes, and live next to my job, to me that would mean Paris, and a high cost of living. Taking all that away, I can live much cheaper, and freely, without even sacrificing a thing.