Understanding what type of lifestyle you want for yourself and your family after achieving financial freedom is one of the most important concepts in building your financial freedom lifestyle goals. Following the step-by-step process outlined in this article will make the task easier.
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Step 1 – Find your passion (or post-financial freedom lifestyle)
Knowing that you want financial freedom isn’t enough. Why do you want it? What will you do with it? Before you can fully embrace the concept of financial freedom, you need a clear picture of what your life looks like after achieving it.
The following factors will all be in play after you quit your day job:
- What type of business or job you choose to have (if any)
- How much time you spend working
- Where you live
- How you spend your free time
- Challenges in your life to keep you engaged
- Bucket-list items you’ll prioritize
If you want to minimize the time it takes to reach financial freedom, choose a post-financial freedom lifestyle with a low cost of living. Also, start a side hustle that can become your income stream (in addition to investments and interest income) and allow you to explore your passions in a way that brings you fulfillment and makes you money at the same time. Win win.
By the time you hand in your resignation, you’ll have a business of your own that’s already making you money that you can spend time on after you quit. Having income streams gives you more flexibility to spend time on hobbies, travel, and bucket-list activities that are important you.
Step 2 – Calculate the Cost
There are a couple of calculations you need to make initially. The first calculation is how much your future lifestyle will cost on a monthly basis, or your burn rate. The second is how much money you’ll need to quit your day job and launch your new life, or your savings goal.
Burn Rate
Your burn rate is based on your estimated cost of living after you quit your day job. To decrease the amount of time it will take to reach your goals, choose a lower cost lifestyle. Research areas that are recommended for retirement.
Cheaper places to live can include expat hot spots in foreign countries, or living in an RV, tiny house, or sailboat. There are lots of neighborhoods in the United States that are cheap to live in, so do your research and decide if any of them appeal to you.
You may want to live on a golf course or country club. Research and find one that’s affordable – they do exist.
The more flexibility you have in designing a cheaper life, the quicker you can quit your day job.
Make it a challenge to yourself to write down your priorities, and then find the cheapest way you can have them and still be satisfied with your choices.
Write out a monthly budget based on your choices, and tally it up for your final Burn Rate calculation.
Savings Goal
To calculate your savings goal, there are several factors to keep in mind.
Let’s say your side business brings in $500 per month, and your post-financial freedom lifestyle will cost you $3,000 per month. That leaves a deficit of $2,500 per month you need to cover with dividend income, stock price appreciation, interest or other investment gains.
What you don’t want to do is drain your investments to fuel your lifestyle. So make sure you have enough in the kitty before you quit.
Scenario 1
Let’s start with the first set of assumptions: $500 per month in business income, $2,500 from investment income. Let’s also assume you can withdraw 5% from your investments without losing any principal.
How much do you need in investments to generate $2,500 per month?
$2,500 x 12 months = $30,000 per year.
$30,000 / 5% = $600,000.
Using our assumptions, to withdraw $2,500 per month you will need $600,000 invested.
Is that more than you planned on saving?
Scenario 2
Another option is to increase your side business income.
Let’s say you work on your business and raise your monthly income to $1,000. Now you only need $2,000 per month from your investments.
$2,000 x 12 months = $24,000 per year.
$24,000 / 5% = $400,000
With this scenario, you only need $400,000 to support your financial freedom lifestyle.
Scenario 3
What if your business made even more money per month?
In this scenario, we’ll assume your business generates an average income of $1,500 per month. You’ll need $1,500 from investments monthly to achieve your goal of $3,000 per month.
$1,500 x 12 months = $18,000
$18,000 / 5% = $360,000
In this scenario you will need $360,000 invested to support your lifestyle goals. Notice how increasing business income another $500 didn’t lower our needed savings nearly as much as in the last scenario?
That’s why its important to play around with the numbers and find a reasonable income to pair with an achievable savings goal to arrive at the most efficient amount and quickest path to financial freedom.
Calculation Takeaways
- Your income stream number works inversely with your required savings amount: the more post-financial freedom income you have, the less savings you need.
- The higher your burn rate, the longer it will take you to reach financial freedom.
Step 3 – Record Your Financial Freedom Lifestyle Goals
Dedicated Planner
Get yourself a dedicated notebook or planner that’s specifically for planning out your path to financial freedom.
Record your dreams, desires, and goals for financial freedom in complete sentences. Keep track of plans you’re making that pertain to your life after financial freedom. This can include new skills you need to learn, housing research, side income ideas, and so much more.
Visualization Tools
Record your savings goal and plaster it on a wall where you see it every day. Based on how much money you can save each month, come up with a timeline to reach your savings goal.
I like to use a big wall chart with a thermometer. As your savings increase, fill it in until you reach the top!
Another fun visualization exercise is to create a giant timeline with key events listed out. For us, that includes things like earning our sailing certifications, when we’ll buy our boat, when we’ll sell our house, etc. I also like to include little things like “attend a boat show” or other relevant events, so you don’t feel like all the events are so far away.
A dream or vision board is another great tool for visualizing your future dreams. I created a vision board from sailing magazine clippings a few years ago and it was left behind in our move. I’m ready to create another one because its fun and gets you energized about goals.
When you’re energized about goals, doing without certain things becomes less painful.
Regularly update your dreams and goals, continually tweaking your plans along the way.
Step 4 – Start tracking your financial freedom goals on a regular basis.
Remember that every dollar you choose to save now is more than a dollar you don’t have to work for in the future. To maximize your savings, take the following steps:
Create a budget.
For tips on budgeting, check out this post with budget tips from different finance experts (including me).
Also, read 5 Hacks To Create A Personal Budget That Works.
Bucket your savings.
Separate out your savings from your earnings every pay day to prevent overspending. For more information on how to do this effectively, read Use a Digital Envelope System to Bucket Your Paycheck.
Increase your income.
There are three primary ways to increase your income:
- Get paid more for your day job. Learn how I tripled my salary in 5 years.
- Start a side hustle or business.
- Invest your savings and receive dividend and interest income, as well as capital appreciation.
Conclusion
Deciding on your financial freedom lifestyle goals is one of the most exciting aspects of any financial freedom strategy. You get to re-design your life based on your interests and passions. Having a strategy to reach your goals will help get you to the finish line much faster than aimlessly saving funds without a defined plan.
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