The Voluntary Life: 80 Financial Freedom Milestones

15 October 2012

80 Financial Freedom Milestones

This episode is a about the significant milestones along the way towards achieving financial freedom. In my opinion, reaching each of these milestones brings you closer to being financially free and it is useful to take a step back and consider what the steps along the way of your journey will be. Some milestones to consider are suggested:

Financial independence or "paying your own way", whereby you are sustaining yourself from your job or work income on a month to month basis. You are not living off parents, not living from significant subsidies from your family, not accumulating student debt and not accumulating credit card debt. It's important to note role how going to college significantly delays reaching this milestone and how many people do not achieve this milestone until they are in their 30s or later.

Achieving positive net worth, whereby your assets are greater than your liabilities. This is often what people mean when they talk about "getting out of debt" (although that is not exactly the same). It is important to be aware that consumer credit and mortgate debt can significantly hinder or delay you reaching this goal.

Making your first investment, for example by purchasing an income producing asset like shares or bonds.  The key distinction is that this is not just money you haven't used yet which you are putting aside until  you spend it, it is money you do not intend to ever spend. You are putting this money to work for you creating income. Although a lot of people consider purchasing a house with a mortgage as their first big investment, a property for your own use is really a consumption item.

Net worth surpasses annual expenses- in other words, your savings (assets) could keep you going for 1 year if you needed to. This means you have a significant safety buffer, but if you did have to use your savings it would mean that you consume your capital and you would be back to square 1.

Annual passive investment income becomes larger than your annual expenses: this is real financial freedom, as  you can now live off your passive income. For this to be sustainable it needs to take into account the effect of inflation, taxes etc. However, once you can sustainably live from your passive income, you are financially free.

This podcast and blog summary contains only my personal opinions, it does not constitute financial advice and I am not a financial advisor.

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  1. I loved it, thanks for sharing Jake :)

  2. The last step, as you say, is the "real financial freedom". And it's surprisingly hard to achieve due to inflation and taxes.

    There are a couple of "rules of thumb" related to this that I have seen on investment forums. The first is that (in the United Kingdom), a couple without children who own their house mortgage-free can barely survive on £12,000 per year after tax. They can live comfortably but carefully (e.g. only one week of overseas holiday per year) on £24,000 per year after tax, and can live a prosperous and enjoyable life on £36,000 per year after tax.

    The second "rule of thumb" is that, realistically, a dependable long-term investment strategy can yield a surplus of 4% per year (after tax, and after allowing the investment "pot" to grow enough to counter inflation).

    By combining those figures, a couple needs a house plus an investment pot of at least £300,000 in order to never have to work again. Investments of £600,000 will enable them to live comfortably forever, and investments of £1,200,000 will enable them to perpetually live prosperously and enjoyably.

    Something to aim for?

    1. Thanks Anonymous, these are great comments and very helpful. I want to go into more detail about each milestone in coming podcasts. I agree with your numbers. If you can live from 3% (or 4%) you are financially free. That means once you have about 33 times your annual expenses banked, you are set to live off your capital. It also means that even if you do have a very significant amount of capital, you still need to be frugal about spending within your means (i.e. within limits like the ones you suggest)

    2. Oops, there was an error with the last figure (the investment capital required for a perpetually prosperous life). £36,000 is four percent of £900,000 rather than of £1,200,000 as previously stated.

  3. Reaching financial freedom is a great goal to have and it takes effort to not spend more than you make. I hope to reach it in about 10 years and then I will travel.