The Magic Number: How Much Money Do You Need To Design The Life You Want?

Author, finance journalist and podcaster Frances Cook shares the secret sauce for achieving financial independence

Financial independence awaits all of us. Photo / Ayan by Scott Hardy for Viva, 2019

Okay, it’s true. There’s a magic number that can help you achieve financial independence, and even quit your job to retire early. But it’s not what you think.

You’ll sometimes see numbers thrown around of how much you need to retire comfortably. A million. Two million. Three, just to be sure. Wanting to retire early? Better make it four million, so that you don’t ever run out. Sure, why not?

Except I’m not an Auckland home. I’m just not worth that much, and I don’t know if I ever will be. Am I going to let that stop me working towards financial independence? No.

Because all of those goal numbers are irrelevant. They’re not the magic number that will actually help us.

What’s important is not a dollar figure that we can pretend applies to everyone. One size does not fit all when it comes to money. Instead, what we want is a plan snugly fitted to you and your life, goals and values. Something that gives you what you need, what makes you happy, and doesn’t waste your time on anything more.

READ: Financial Strategist Hannah McQueen On How To Save Money The Smart Way

So if you want financial independence, the first thing you need to think about is what you want in life. Then you need to do just the smallest, simplest bit of maths.

How much does it cost you to keep a roof over your head? What are the things in your life that make you truly content, and how much does it cost to keep them in your life? Most importantly, what do these things cost you in a year?

This is the magic number — your own magic number, unique to you. Then just a little bit of maths. You multiply that yearly number by 25.

If you have a nest egg that size, invested into the right mix of shares and bonds, you should be able to live off it for decades.

You can take out four per cent of the nest egg each year, which gives you the yearly figure you added up before.

That 4 per cent of spending is the other magic number that makes everything work for you. Because your investments are still growing and working for you, you can pay for everything you need and want in a year, but you shouldn’t run out of money for decades; if ever.

It sounds absurdly simple, doesn’t it? Except the problem is, that 25x figure might look enormous. You might have quickly added up some numbers and decided that I’m spinning a fairy tale that can never be achieved by normal people.

This is why we need to open up more options to make financial independence more achievable. When we focus back in on what needs to be paid for, and what really makes you happy, then we have wriggle room to make changes in a way that works for you.

Desperately hate your job, and want to be able to retire in just a few years? You’re probably ready to make more sacrifices, in order to make your magic number smaller and hit it sooner.

Earn quite a bit, or don’t mind working towards a goal for longer? Then you can have a bigger end number in sight.

For those who want financial independence fast, the trick is deciding what’s really important in your life — and cutting everything else out. If your life doesn’t cost much, then your 25x number won’t be as big.

Don’t forget, if the goal is to quit your job, that might also save you a bunch of money. You won’t need work clothes, to pay for a commute, to buy lunch near the office.

READ: Co-Founder Of Sharesies Brooke Roberts On How To Grow Your Wealth

If you pull everything back to bare-bones basics, how much do you need then? Would living in a tiny house be worth it, to never have a boss again?

If you like the finer things in life, and don’t mind waiting a bit longer, then you can keep the 25x number a little higher, knowing that you’re working towards a goal that’s a few decades away, but that will give you security when you eventually get there.

Or there’s my personal favourite solution; working towards a 25x number that covers only the very basics in life, but planning to still earn money once you get there.

You could have the basics of food and shelter sorted, thanks to your investment nest egg, then work part-time, or in a job that doesn’t pay much but is more satisfying, or start a business that may or may not work out.

It gives you the freedom to push for that “work-life balance” that everyone is always going on about. To find more satisfying and fulfilling ways to make money, or live a good life while working substantially less.

You have options because the basics of survival are taken care of, thanks to a financial independence plan that’s tailored to you.
Finding the magic number that fits your own life, goals and values is the key.

Frances Cook’s new book Your Money, Your Future: The Realest Guide to Financial Freedom, published by Penguin, $35, is available now

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