How much money do you need to live without working?

It's called the 25 times rule, and it's very simple. You multiply your annual spending by 25, and that is the minimum amount of money you would need invested to fund your lifestyle without working.

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Financial Freedom

How Much Money Would You Need to Stop Working for the Rest of Your Life?

Figuring out how much money is “enough” for you

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The entire point of accumulating money is to trade it in for time and freedom. But, how much money do you actually need to exchange for a lifetime of doing what makes you happy and fulfilled? The answer to that question can be incredibly clarifying for your financial plan. To come up with your minimum number for what you consider “enough,” we need to talk through three issues; The connection between money and happiness. Cost of living and what you value in life. Building your savings plan to accumulate “enough” money.

The depressing reality of money and happiness

It turns out that money can buy happiness. But only if you make more money than your neighbor. That was the finding of a research paper published in the Journal of Psychological Science. The study found that people were slightly more satisfied with their life as they made more money, but their level of satisfaction peaked when they were told that they made more money than their neighbors. Similarly, if someone found out that their neighbor made more money than they did, they were less likely to be satisfied with their own life. People are more concerned about their economic rank in society than funding a happy, fulfilled life. Based on the results of this study, if I asked someone how much money I would need to give them to stop working and still live a happy life, their response would be “$1 more than my neighbor will make.”

That is a depressing and sobering statement.

Let’s turn the conversation in a more hopeful direction and talk about the steps you can take to break free of the status quo of tieing your happiness to your economic rank in society.

Put your phone down

You will never have “enough” money if you compare your financial position to any other person. First, don’t compare yourself to insanely wealthy people like Elon Musk or Jeff Bezos. That should go without saying, but based on the amount of clickbait floating around the internet with titles like “how to become a billionaire,” I suspect a lot of people are holding onto that pipe dream.

Repeat after me; I Will Never Be A Billionaire

Next, don’t compare your financial position to your friends and family. To easiest way to avoid that trap is to delete all the social media apps from your phone. Most people use social media to paint themselves in the best possible light. If you were to scroll through most of your friend’s Instagram feeds, you would find pictures of them on epic vacations, eating at the best restaurants, and dressed to the nines. What you wouldn’t see is pictures of them eating in front of the TV with a mustard stain on their shirts, even if the mustard statin is more representative of their day-to-day life.

Social media amplifies social comparison and pushes people towards lifestyle inflation.

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I realize that you probably won’t delete the social media apps from your phone. But, it’s important to remember that what people post on social media is not real life. If you constantly compare yourself to the fake reality of how people present themselves on social media, you will never reach financial freedom. Remember, to have “enough,” you need to be able to fund a lifestyle that makes you happy for the rest of your life. Cut through all the noise and BS and keep that thought top of mind at all times.

How much money do you spend on things you value?

How much of your money do you spend on things that you truly value and make you happy?

To be able to answer that question, you need to know two things.

What do you value? How much do you spend on those things each month?

To help you figure that out, I created this free expense tracker here. This expense tracker breaks down each of your purchases into one of three categories. The “big 3.” Essential spending on housing, transportation, and food. Values. Any money you spend on things that make you happy. “Stuff.” Any non-essential spending that does not provide any real value. It also goes a step further to tell you how many hours you needed to spend working to pay for each purchase throughout the month. I would encourage you to use the expense tracker to figure out exactly how much you are spending on a typical month right now. The feedback I have gotten from people, is that using the expense tracker has helped them identify some expenses that they could cut without impacting their happiness.

Which is critical.

To know how much money is “enough,” you must know your minimum annual spending that would allow you to live a happy life. Make no mistake, finding out your minimum spending for happiness is the most important number in your financial life. It’s well worth it to invest some serious time in figuring this out. Once you do, figuring out how much money you need to fund that lifestyle is a simple math equation.

How to save “enough” money

The Financial Independence, Retire Early (FIRE) movement has a handy rule of thumb that would give you a rough estimate for the minimum amount of money you would need to fund your lifestyle without working. It’s called the 25 times rule, and it’s very simple. You multiply your annual spending by 25, and that is the minimum amount of money you would need invested to fund your lifestyle without working. (A word of caution: Like with any rule of thumb, the 25 times rule is not precise. The proper use of this rule of thumb is to get a ballpark figure, not an exact number.) Let’s say you figured out that the minimum annual spending that would allow you to live a happy life was $40,000. Using the 25 times rule, you would need at least $1 million. The next step is to set a goal for when you could achieve that savings goal. Let’s say you wanted to have the $1 million saved in 20 years, and you’re starting from scratch. If your investments provided a 6% annual return, you would need to save $2,154 per month.

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Then you would have “enough.”

An alternative to tieing financial freedom to a lump sum of cash

If you’re thinking that saving over $2,000 per month for 20 years is hard, you would be right! And remember, that is the minimum you would need saved. Before you get completely bumbed out, let me remind you that you don’t have to save $1 million to start spending your time doing what makes you happy and fulfilled. You don’t even have to stop working. You just need to find work that you love and that makes you fulfilled. That makes life a whole lot easier. Every dollar you can earn each year doing something you love, is worth $25 that you don’t need save to have “enough.” In the above example, we saw that to fully fund your $40,000 annual living expenses through savings; you would need $1 million. However, if you find a job or start a business with flexible hours doing fulfilling work that you love, you can greatly reduce your number for what is “enough.”

If you can earn $10,000/year, you only need $750,000 saved.

If you can earn $20,000/year, you only need $500,00 saved.

If you can earn $30,000/year, you only need $250,000 saved.

If you can earn $40,000 per year, you could start spending your days what makes you happy and fulfilled right now! The key to financial freedom is a combination of passive income from your investments and the ability to earn money doing something you love. In fact, I’ve simplified that into the “financial freedom equation.” Financial Freeom= (Passive income + income from work you love) > Your living expenses

Actionable steps to financial freedom

Never compare your financial position to anyone else. Not Elon Musk and not your neighbor. Remember, social media is not real life. Social media leads to FOMO, FOMO leads to lifestyle inflation, lifestyle inflation leads to suffering. Start tracking your spending to see how much you spend on things you value. Cut your spending to your minimum amount that allows you to be happy. Use your minimum spending number to create a savings plan to fund that lifestyle. If you want to speed the process up, find a way to make money doing work you love. Keep focused on your goals and enjoy life along the way. You got this.

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