What’s your number? I had heard this question before, but this time, it wasn’t an invitation to get to know me better or take me out on a date. Instead, it came from a YouTube video I watched one restless night when sleep had me wrapped up in a game of hide and seek.
I was first introduced to the concept of financial independence while listening to Wendy Williams during her radio days, which she referred to as “F.U. money.” The idea lingered as I wondered how long I could cheat on my side hustle with my corporate gig. It wasn’t until I saw that video that I realized there was a viable way out.
So what exactly is financial independence, and more importantly, how do you know you’ve arrived at this seemingly elusive destination?
It depends on who you ask. I’ve realized that financial freedom is as individualized as our taste in shoes and changes as we age. In my twenties, I could dance the night away in 3-inch stilettos until 5 a.m. Now that I have reached the 40-year-old mark, I’m more likely to opt for a pair of flats.
For some, becoming financially free means not having to work a 9-to-5, while for others, it means never worrying about money again. Defining what financial independence means to you based on the lifestyle you want to lead is one of the most important steps you can take on your financial journey. It will help you determine how much revenue you need to generate and the time frame for achievement.
Your Freedom Number
If you browse the Internet, the most common formula for determining your financial independence or F.I. number is calculating your yearly spending and dividing that number by your safe withdrawal rate (the amount you can withdraw from your savings each year without depleting your funds). According to the Trinity Study, the recommended withdrawal rate for 30-year retirements is 4 percent. Once you’ve established your F.I. number, subtract it from your current savings and divide it by your yearly spending.
Sounds easy enough. Just populate a magic number, and all your financial troubles disappear. The reality is this: Many of us can save relentlessly, contribute to our 401k, and still not attain economic freedom, particularly when we only have one person’s salary to depend on. Furthermore, this approach doesn’t account for navigating unforeseen life circumstances like medical bills or becoming a caregiver.
Although women earn more money now than ever, buy more homes, and outpace men in higher education attainment, we still lag in retirement and financial independence. According to the National Institute on Retirement Security, women are 80 percent more likely than men to experience poverty by age 65 and require 20 percent more than men to cover their medical expenses.
The secret to achieving and maintaining financial freedom is to have post-retirement income streams, such as real estate and stock or mutual fund investments. I’ve witnessed this through my parents. In addition to operating a brick-and-mortar business, they owned an apartment building and invested heavily in mutual funds. When they decided to retire, they moved to a cheaper state and bought several real estate properties to rent out, so they could use that money to fund their retirement.
Buying a rental property or investing in the stock market may seem like a pipe dream when you can barely make ends meet. In that case, I invite you to try the following exercise. Grab a notebook and map out possible revenue streams. For example, consider selling your creations if you like to bake or make jewelry. Have a passion for planning parties? Offer your services to your coworkers and friends. Take something you already do for fun and see how you can profit from it. Then, use that additional income to invest.
While the path to financial independence can feel like you’re walking a tightrope in stilettos, the trick is to go beyond setting your financial target and focus on generating revenue streams that will last you well into your golden years.
Photo by Mikhail Nilov