One of the things I track every month is how much of my expenses can be covered by the income I could generate from my investments. The idea is that when this number reaches 100%, I will be financially free.
Your financial freedom percentage is a really important metric to keep an eye on. Because at some point, we are all going to need this value to be 100% (otherwise, we will be doomed to an uncomfortable retirement).
Fortunately, your financial freedom percentage is really easy to calculate (and that’s largely thanks to the simplicity of the 4% rule). All you need are two pieces of information:
- The total value of your current investments
- Your total monthly expenses.
Then you just plug these into the following formula:
So, for example, if the value of all your current investments total R800,000, and your monthly expenses are R16,000 a month, then you would get;
A Word On Expenses
Just something to consider about this calculation’s total expenses value.
Remember that your expenses when you are financially free, could be slightly (or very) different to what your expenses are now. You may no longer have costs such as a work commute, school fees, or home loans. On the flip side, you may have additional expenses like travel and hobbies. So it may be a good exercise to estimate what your expenses might be once you are actually financially free. Then simply use that value for the total expense input of the calculation.
For the finance nerds, you can read more about why the formula for calculating your financial freedom percentage is so simple by checking out this article.
Our friend Stealthy Wealth knows his way around maths. Luckily for us he also speaks human, which is why we asked him to explain the most important maths we need to know to be good at money. This is not your average maths class. Tune in once a month and turn into a money mathemagician.