I started this post with a clear topic and outline. Yet somewhere in the writing process it began to veer away from crunching numbers and took a turn to the philosophical. What was originally titled “How to Calculate Your Freedom Number” has evolved into “What is the right template by which to live your life?”. This blog is meant to be a journey and I therefore expect many new discoveries along the way. This little discovery just happened to be a sneaky one that showed itself by infiltrating a well organized draft.
In the spirit of self discovery, I’m going to roll with it.
Defining Financial Freedom
The main topic for this post is financial freedom, otherwise known as financial independence. Financial freedom is reached when you no longer need income from your work. Whatever that job is that requires your time. How much money you need each month depends on your freedom number. This is the amount of money you need every month to cover all your expenses. This will be unique to the individual or the family. If you reach your freedom number with passive and investment income, you are ready to retire. Or, if retire is too strong a word, you have the freedom to use your time however you like. This could be staying at home to raise your kids, traveling the world, going back to school, exploring new business opportunities, anything that you otherwise would not be able to do because you are busy earning your paycheck.
Financial Freedom: The point at which life can be enjoyed free of the need to earn an income because all living expenses are covered by either passive income or interest earnings from investments.
Freedom Number: The monthly dollar amount needed per month to maintain financial freedom.
The FI Community
Financial freedom is not a new concept, but it does seem to have a new following. I keep reading the stories of an increasing number of millennials who, contrary to popular belief (of the older generations), are not only good at saving money, they are so good at it that they aren’t working very hard. There is increasing evidence that millennials aren’t as lazy as we think they are, they simply have a different approach to life.
There is a clearly defined blueprint to life that we are taught. It’s called the American Dream. You work hard in school, go to college specifically to land a great job, you get married and buy a big house. The more experienced you become in your field, the more money you make. This is when you trade up your car and your home for something newer and larger. You trade your time for money, your money for things, you invest in your 401k and rely on your company to help you reach retirement when it is finally time to exit the workforce.
Perhaps millennials have discovered that this blueprint is simply not the best plan to follow.
The millennial generation is big. Bigger than the baby boomers. And they seem to be saving better than the older generations. According to the Goldman Sachs millennial data story, 17% of millennials have already saved $100,000. This is a much faster savings rate than the other generations. But they aren’t saving in order to exit the workforce at retirement age. According the the Spring 2017 Merrill Edge Report, millennials are saving for financial freedom. A whopping 63% reported saving money for their lifestyle, not retirement. But how are they doing it? What does it really take to get there?
For starters, their priorities are very different. Fewer millennials are getting married, choosing to have kids or even buying cars. They are focusing on health and lifestyle. They are cutting the expenses they need every month in favor of living the life they want, now.
Having not fully embraced this shift in lifestyle myself, I have to ask, what is the better way? What blueprint should I be following?
The Financial Freedom Number
There is a growing movement towards minimalism and frugality. As I think about financial freedom and calculating my freedom number, clearly defining just what I need to earn and save every month to achieve freedom, I realize that I can’t clearly define that number without defining the lifestyle that will ultimately make me free. Because free and happiness are quite similar. Is there really any difference? Millennials don’t seem to think so and maybe they are onto something.
My financial freedom number is somewhere around $5,700 a month. This is what I require right now, after taxes, every month. This is housing, medical, private school education, food, hobbies and savings. Factors making this number more difficult to define include the following: My rent is significantly lower than average housing costs, I have assistance with private school tuition, and my company pays for the majority of my healthcare and dental coverage plans. If I factor these back into my expenses, I probably need closer to $9,000 every month.
Seriously? $9,000 every month? That’s $108,000 per year, take home. Or, including California and Federal taxes (37.3%), roughly $148,000. This is what it costs to live my current lifestyle comfortably in my area. If you are shaking your head right now, you aren’t alone. Mine is shaking, too. According to payscale.com, the cost of living in San Jose is 48% higher than the National Average. According to an HSH study, the salary you need to earn to afford a home in San Jose is $235,646.36. See? I’m not being greedy and materialistic. Oh, I did forget to factor in the expense of buying my own home. Damn.
Which leads me back to questioning lifestyle choices as they relate to financial freedom. There are two options to reach financial freedom, you can earn more, or, you can spend less. Either way allows you to increase your savings and invest more. As I read other blogs on frugality and budgeting, most of them seem too extreme for me. I just finished watching the documentary Minimalism on NetFlix. Again, it seems a bit extreme. I’m not about to sell off all my possessions and move into a tiny home in someone’s backyard. But, I’m beginning to think there’s an in-between that is right for me. It’s just up to me to start that journey and discover what the right level of lifestyle change is.
I’m not on board yet, but I am coming around to the idea that just maybe these younger millennials are onto something good.
Following the theme of self-discovery, I’m going to list my own action steps first. These are the things I need to contemplate further:
- What level of frugality is right for me? How far am I willing to go in my efforts to cut down on all the extraneous things in my life?
- What are those extraneous things? If I start viewing my lifestyle from the perspective of frugality, are there any areas that I can improve upon?
- Some examples to think on:
- Food spending
- Clothing (Do I have too much and do I really want more?)
- Travel around town (Can I be better about combining errands and walking/biking?)
- Personal care
- Dependent care spending and teaching by example a lifestyle with less focus on material possessions and more focus on quality time outside and together
Questions to ask yourself:
- After reading this post, what are your thoughts on financial independence and what your journey might look like?
- Are there any lifestyle changes that you will need to consider?
- What level of frugality could you be comfortable?
- Would you push that if it meant achieving financial freedom?