If you want to retire early, escape the rat race, or just save some money, knowing this number is vital to achieving your goal.
It’s easy to focus on the amount you want to save, but sometimes it’s helpful to reverse that, and look at the expenses we have to cover.
Disclosure: Based on personal opinion, not to be taken as advice. Seek a professional if required.
What Price Financial Freedom
The most important number to your financial freedom is the total cost of your monthly bills.
It’s the amount you ‘need’ to spend each month, just to get by. Not the amount you ‘want’.
Once you know what the number is, you can start working on a way to get it, without spending 40+ hours a week at the day job.
I know, from experience, that we need £520 (US$718) per month. That is to say, my family unit could comfortably subsist on £520 per month. It would involve making changes, and living in a smaller space, but that is our freedom number.
That means, if we made changes, we would need to earn a minimum of £520 per month. Just £6,240 (US$8,626) per year.
It is the number that lies between us and the rat race.
It is the most important number for our financial freedom.
How Do You Find Your Number?
Count everything. All of it. The small payments, the one off payments, the bill that you only remember at the end of the month when you see your bank statement.
Count annual bills, like council tax, house insurance, car maintenance, school fees, and even dentist costs.
The only costs you wouldn’t count, are those which wouldn’t exist, once you were free. So, if you pay for a gardener now, you might not need one after. If you pay for a dog walker now, you probably won’t require one after.
Finally, take the total annual sum and divide it across 12 months, then add the result to your normal monthly expenses.
Our total of £520 is not the most frugal. It represents where we would be comfortable. An important absence from that number is a mortgage, or rent, as the ‘smaller space’ would mean removing a mortgage. The rest of the costs are arrived at thusly:
Council Tax: £125
Total Dog: £50
Total Insurance: £30
Total Car: £40
Total: £520 (US$718)
Reducing Monthly Expenses
If you’re reading this, you probably already know how important it is to reduce your expenses. Really knowing how to live frugally, is the most important thing one can learn in that regard.
There are only two ways to impact the money in your pocket, and it’s worth understanding them both.
The first is to increase your income. If you can get a pay rise, a side hustle, or find some other way to increase your income, you will increase the money in your pocket.
The second option is to reduce your expenses. Even if you can’t get that pay rise, you’ll have more money in your pocket if you can cut back.
Money in the pocket, is money that can be saved, or used to start a business.
No matter your path, whether you want to start a business, obtain financial independence through saving/investing, or simply seek a way to escape the rat race, the most important number you need to understand, is that of your monthly expenses.
It is that number which will act as the bench mark, indicating when you’re able to walk away from the day job.
This is a simple idea but, I think, an important one. I know people who, when asked, can’t give me a rough idea of their monthly expenses. If you’re trying to overcome the need for money in the modern world, I suspect you can’t be one of them.
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