Saturday, October 25, 2008

Determining Your Financial Freedom Number

In the book Commonsense Rules for Financial Freedom, the author comes up with a financial freedom number. What is this financial freedom number and how do you calculate your financial freedom number?

The financial freedom number is simply taking your monthly total passive income and subtracting it with your monthly expenses.

Financial Freedom Number = Monthly Total Passive Income - Monthly Expenses

A negative number would mean that you are still not financially free and would need to make up for that number in terms of passive income to become financially free. Let's take for example my scenario:

I have $224 in monthly total passive income and $3887 in monthly expenses. My financial freedom number is thus -$3663. That would mean to be financially free, I will need to make an additional $3663 per month in terms of passive income to maintain my current standard of living (without accounting for inflation).

This is enlightening. First it means that in my initial financial freedom goal, the sum of $2800 per month that I was targeting is not enough for me to be financially free. That is unless I continue to reduce my monthly expenses to $2800 or less.

There you have it, a simple way to calculate your financial freedom number. Mine is -$3663. What is your financial freedom number?


Other Articles of Interest:

What is Financial Freedom to You?  This is my own definition of Financial Freedom:  My Financial Freedom Goal



4 comments:

  1. It's better to divide to get the so-called ratio, because it becomes the same for everyone -- 1.0 means you have achieved financial freedom.

    My financial freedom ratio is 0.05...

    ReplyDelete
  2. Hi nhyone. Thanks for the inputs. Yes, I guess we can calculate our financial freedom in terms of ratios too.

    Do visit this site again soon!

    ReplyDelete
  3. I just looked up a definition in another blog:

    financial freedom ratio = liquid asset / annual expenses

    financial independence ratio = annual passive income / annual expenses

    The first shows how many years you can survive without working. The second is what we are talking about. Just that the name is different.

    Having numbers to measure progress is fun... :)

    ReplyDelete
  4. That's true. Having numbers to monitor helps to see whether you are progressing in your financial freedom journey. Some people however prefer not to use any numbers to measure as they believe it creates undue pressure or stress.

    Well at least for me, I know I am not that disciplined in terms of investing and budgeting, etc so having some kind of number to track my financial freedom (or my journey towards it) helps in a certain sense.

    ReplyDelete

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