By Warren Ingram, CFP®
Achieving financial freedom is a goal many aspire to, but it can seem elusive without a clear roadmap. One of the most critical steps in this journey is determining your Financial Freedom Number (FFN). This number represents the amount of money you need to sustain your desired lifestyle without relying on active employment income. Let’s explore why your FFN is crucial and how it can transform your financial future.
Defining Your Financial Freedom Number
Your FFN is essentially the amount of wealth required to cover your annual expenses indefinitely through passive income sources. To calculate your FFN, start by assessing your annual expenses. Multiply this figure by 20 if you are over 65 or by 25 if you are younger.
For example, if you’re 25 years old and your annual expenses are R250,000, you would calculate your FFN as follows:
FFN = Annual Expenses × 25
FFN = 𝑅250,000 × 25 = 𝑅6,250,000
FFN = R6,250,000
If you are 65 years old and your annual expenses are R250,000, your FFN is R5m (R250,000 x 20).
The Benefits of Knowing Your Financial Freedom Number
1. Clarity on Your Financial Goals
Knowing your FFN provides a concrete target for which to aim. It turns an abstract concept of financial freedom into a tangible goal, making it easier to plan and save. With this number in mind, you can create a detailed savings and investment strategy that aligns with your long-term objectives. It also enables you to evaluate and adjust your lifestyle choices to meet your financial targets, potentially cutting down on unnecessary expenses.
2. Control Over Your Time
One of the most appealing aspects of achieving financial freedom is the autonomy it offers over your time. With your expenses covered by passive income, you gain the flexibility to work when and how you choose—or not work at all if that’s your preference. This freedom means you can pursue other passions, hobbies, or interests without the financial pressure of traditional employment. Imagine the freedom to explore new career paths or enjoy more leisure time while financially secure.
3. Ability to Pursue Other Interests
Reaching your FFN opens doors to a variety of opportunities. Whether you dream of starting your own business, travelling the world, or dedicating more time to family and friends, financial freedom allows you to explore these interests without the constraints of a conventional job. This flexibility can lead to a more prosperous, more fulfilling life, as you’re no longer tethered to the 9-to-5 grind.
4. Increased ability to take risk
Financial freedom provides a safety net that enables you to take calculated risks more confidently. Whether investing in a new venture or pursuing a career change, having your FFN in place means you can experiment with opportunities that might have otherwise seemed too risky. This increased risk tolerance can lead to personal and professional growth, enriching your life experience.
Achieving Your Financial Freedom Number
To reach your FFN, start by setting a clear and actionable plan. Here are some steps to guide you:
1. Assess Your Current Financial Situation: Review your income, expenses, savings, and investments. Understanding where you stand financially is the first step towards planning for your FFN.
2. Create a Budget and Savings Plan: Develop a budget that aligns with your FFN goal. Identify areas where you can cut costs and increase savings. Allocate a portion of your income towards investments that will grow your wealth over time.
3. Invest for the long-term: Focus on building a diversified investment portfolio that aligns with your risk tolerance and time horizon. Consider consulting a financial planner to help you make informed decisions.
4. Monitor and Adjust: Review your financial progress regularly and adjust as needed. Staying on track requires periodic reassessment of your goals and strategies.
5. Stay Disciplined and Patient: Achieving financial freedom is a long-term commitment. Be disciplined in your savings and investment plan and patient as your wealth grows.
Conclusion
Understanding your Financial Freedom Number allows you to take a step towards taking control of your financial future. It clarifies your financial goals, offers control over your time, enables you to pursue personal interests, and increases your ability to take risks. By calculating and working towards your FFN, you can pave the way to a life where you have the freedom to live on your terms. Embrace the journey towards financial freedom with confidence and determination, knowing that every step you take brings you closer to a more fulfilling and autonomous life.
Written by Warren Ingram
CFP®, Wealth Manager, public speaker, and author. Host of the Honest Money podcast. FPI South Africa Financial Planner of the Year 2011.
