STEP 3: FIGURING OUT HOW MUCH YOU WILL NEED

This step is crucial for achieving financial independence. If you don’t know how much you’ll need, you won’t know when you can stop working and start enjoying your life and financial freedom.

I have a cousin who works in finance. He has three kids, a big house, cars, and his children attend private schools. They take vacations abroad and never compromise on their lifestyle. Despite this, he’s not a big spender and used to say he could retire by 40 on his investments. However, he never did because he always felt the need for more money as his lifestyle inflated.

So, how much do you need to live on each month? I did some calculations for myself. I envisioned a simple life in the countryside, living in a paid-off house. In rural France, fixer-uppers are quite cheap; you can find a house for around $50,000. I figured I’d need about $1,000 per month to live, incorporating gardening and other self-sustaining activities. This would mean I’d need $50,000 for the house and $750,000 for living expenses, enough to last until I’m 95 at $1,000 per month.

Alternatively, I could generate this $1,000 a month through rental income or investments. My projections aren’t entirely accurate since, in France, retirees receive about $500 from the government along with free healthcare. However, living abroad might mean forfeiting these benefits.

Generating $1,000 monthly isn’t too difficult. I have a rental property that will cover this once the mortgage is paid off in 28 years. Additionally, I want an emergency fund covering 2-3 years of living expenses, which totals $30,000. This fund would cover real emergencies like health issues or major house repairs. If everything falls apart, this fund would also support me until I get back on my feet.

Luckily, I’m almost secure with my rental property. If I had the savings invested at a conservative 4% growth rate, I could withdraw 2% annually for inflation adjustments and save the remaining 2% for emergencies. This means I’d need $600,000. As I don’t have that amount in my bank, I’ll continue seeking ways to generate passive income from what I own and new ventures.

What you’ll need to live comfortably could be more or less than my requirements. Jacob from Early Retirement Extreme lives on $7,000 a year, including health insurance in the US, but he follows a very extreme lifestyle.

You might have kids, college funds, or a partner who isn’t keen on living in a smaller house in the countryside. Nevertheless, it’s essential to run your numbers. You may be surprised at how low your necessary expenses can be.

With a job, living on $1,000 a month wouldn’t be possible. I’d need to dress well, likely need a car for commuting, fuel, occasional gifts for colleagues, and live close to work, which for me would mean expensive city living, like in Paris. By removing these expenses, I can live much cheaper and more freely without sacrificing my quality of life.