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That question is normally phrased differently, asking if you want to be a millionaire not need to be one. You know the TV series, of course, that has played across the world, from Afghanistan (where there are two versions in different languages) to the supposedly still Socialist Republic of Vietnam.
No one ever bothers to ask a couple of other more useful and more interesting questions though.
At least, no one (except us) has asked those questions (before now). The answers are:
Our friends at Happy Ever After have developed a simple equation they call the Freedom Formula which tells you how much wealth you need today to stop working.
The freedom to choose what you do with your day might be more important to you than a random number in the bank.
To us, freedom is that we no longer have to work for money. We might choose to, but if all our spending needs were being covered by our investments, then we would be free to do the work we choose to do.
So, if we were to start a gameshow, maybe we would call it “Who wants the Freedom Formula?” but it wouldn’t last very long, because the Freedom Formula is very simple.
If you can save enough money that you have investment assets that are twenty-five times your annual spending, you should never need to work again. You should be free.
That’s because your investments, making an average of 7% a year (just like the Seven Dollar Millionaire), will enable you to take out 4% as spending (4% times 25 is 100% – that’s why you need 25x your spending) leaving 3% left over to cover for inflation. Your asset base should continue to grow in line with inflation, meaning you can take out a little bit more each year without the real value going down over time.
If you spend $20,000 a year at the moment, you don’t need to be a millionaire. If you can save half a million dollars, right now that would be enough for you. If you spend $50,000 a year though, then a million won’t be enough. You’ll need $1.25 million to be free.
If you think about it, you can see right there what we love about the Freedom Formula the most. While the Seven Dollar Millionaire just talks about saving and investing, the Freedom Formula talks about spending, and how what we choose to spend dictates how much you need to be free. If you tell yourself you need $200,000 a year to live, then you’ll need $5 million to be free, but if you can enjoy your life on just $10,000, $250,000 will be enough for ever.
Featured in the FINANCIAL TIMES, and the DAILY TELEGRAPH, our MISSION is to help create millions of millionaires. We want people all over the world to use our simple tools to save emergency funds, turn those into investment plans and create the habit that will help enrich their lives.
If you’re interested in financial literacy, please also look at our new project www.maiawards.org