The concept of financial freedom continues to gain popularity – either through the FIRE movement or people abandoning the work-until-you’re-65 mentality. However, it can be unnerving during times like this.
The market has fallen sharply, our economy is heading for (if not already in) a recession and your income may be unstable right now.
We haven’t experienced a recession since 2008/2009 and it’s never easy. Even though the cause varies, recessions are actually a very normal part of an economic cycle.
Because of this, you may be thinking financial freedom is not realistic anymore, but that couldn’t be further from the truth. This is actually a fantastic time period for you to reevaluate how financial freedom would actually work for you.
What is financial freedom?
To be honest, everybody defines it differently which can make it confusing. The most common way financial freedom is defined is by having between 25x – 29x your annual living expenses saved in an investment portfolio.
Why? Because this calculation is predicated on the assumption that you can comfortably spend between 3.5 – 4% of your investment portfolio each year with a low risk of running out of money.
This makes sense if you are truly only relying on your investment portfolio for income… but that’s not the case for most people. Most people earn income throughout their life – either through working, generating passive income or another avenue.
My definition of financial freedom is the ability to work a passion-aligned job when you want, where you want and how you want in a way that financially supports your dream lifestyle. In other words, you are doing what you love and living the lifestyle you have always dreamed of.
Why would you ever want to stop doing that?
Rather than “retiring”, you continue to work, but work doesn’t actually feel like “work” to you. The idea of “retirement” is literally unhealthy – it doesn’t make sense to work your entire life to all of a sudden stop. You need the mental stimulation, sense of purpose and social interaction that comes from work.
“Retirement” stems from the idea that most jobs used to be physical labor and our bodies could not handle that work past a certain age! It’s built upon outdated IRS and government rules which dictate when we can withdraw money or receive benefits like Social Security and Medicare. With technology and the gig economy, we can work in ways that were never possible before. Okay – rant over
When you prepare to work longer, it allows you to experience your money throughout your life, as opposed to simply starting in “retirement”.
But how does this work in practice?
In order to ditch the work-until-you’re-65 mentality, you need to figure out how you could actually generate income. There are two parts to this – 1) what is it that you would love doing and 2) how could you do it in a way that fits your dream lifestyle?
Let’s say you have a young family. You want to be able to travel with your family (and maybe even live abroad at some point), attend all their soccer games and be a present parent. This can be really difficult if you are working a job that is dependent upon you physically being somewhere at specific time periods.
If this type of lifestyle appeals to you, you need to plan for how you can make your income work. That might be starting your own business, doing consulting work, or negotiating terms with your employer.
However, if you plan properly, it allows you to experience your money throughout your life, do work that excites you and live your dream lifestyle. This is financial freedom in my eyes.
How has financial freedom been impacted by the Coronavirus?
Well, let’s take a look at the 3 components of financial freedom – 1) your dream lifestyle cost, 2) your income and 3) your portfolio withdrawals.
Your dream lifestyle cost
You can control this.
Do you know what it costs to live your current lifestyle? My guess is no. Most people have no idea what they spend which makes it very difficult to make any type of financial forecast.
This is why I tell people that tracking their spending = awareness. It’s not a punishment, but rather helps you become more aware of whether or not your spending is aligned with your values. It makes you a much smarter consumer.
A possible silver lining to the current quarantine is that you can figure out the barebone minimum cost to live your lifestyle. Reflect back on your spending in March – you probably spent more on Netflix and games for the kids, but you didn’t go out to eat, didn’t travel anywhere and barely spent money on gas.
While your dream lifestyle cost is not directly affected, this period of time can help you understand what your “lean” budget would be if you ever need to severely cut back costs in the future. I recommend that you identify a “fat”, “moderate” and “lean” budget, so you know where you can turn up and down your spending if you ever need to.
You can somewhat control this.
Have you experienced a drop in income during this time period? You may not be working your dream job yet, but this difficult time period allows you to “test out” whether you could still generate income during a recession.
If your ability to generate income is dependent on a good economy, then you need to be prepared to cut costs during a recession. On the other hand, if you can still generate income regardless of how the economy is doing, it reduces your need to lower costs.
Remember, the income aspect of financial freedom is doing work you love when you want, where you want and how you want. Ideally, you will have the ability to turn this up and down based upon your financial needs and the economy.
Your portfolio withdrawals
Unfortunately, you can’t control this.
The perfect, most well-thought-out investment strategy will still go down in a recession. Let’s say you have $1.5 million saved up and you’re withdrawing 4%. Your total annual withdrawals would be $60,000.
As a result of the Coronavirus, that $1.5 million investment portfolio is most likely worth about $1.2 million now. Using the same 4% withdrawal rate, your total annual withdrawals would now be $48,000, or $12,000 less.
Your portfolio withdrawal is the variable you can’t control, which means you need to be prepared to adjust either your income or spending to “make up” for lower withdrawal amounts.
What should you do now?
Most of you are still on your path to financial freedom. For others, this may be a completely new idea. When you break down what financial freedom actually means, it ultimately entails spending your time in a way that is exactly aligned with your core values.
In other words, the true measure of wealth is time, as opposed to money. Money doesn’t buy happiness, but it can buy us the opportunity to spend our time doing things we truly love.
Use this quarantine time to paint the picture of what financial freedom looks like to you.
What would your lifestyle look like?
How would you be spending your time?
What type of work would you want to do?
One of the most common mistakes people make is not having a clear vision of what they want their money to accomplish for them. As a result, you don’t know how much money is “enough” and you will keep sacrificing your valuable time in the endless pursuit of earning more money.
Once you figure out your ideal lifestyle cost and how much income you could generate, you can then figure out how much money you need saved up in an investment portfolio.
- The first variable of financial freedom is your ideal lifestyle cost. Start painting the picture of what that looks like for your family and then start tracking your spending so you can make an educated guess as to what your ideal lifestyle would cost.
- The second variable of financial freedom is the income you could generate working a job you love when you want, where you want and how you want. Think about what that could be and what type of income that could generate. Do you have control over it? Is it dependent on the economy or other people? It’s important to understand how this variable is impacted, so you can be prepared to adjust your living expenses.
- The last variable is your investment portfolio. This is simply the “plug” to make the equation work. It’s not enough to figure out the number, you also need to be sure you are saving in the right ways so you aren’t paying steep penalties and tax if you use money before age 59.5 This is why “traditional” money decisions change when you ditch the work-until-you’re-65 mentality.
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