Everyone knows money can’t buy happiness, but it can buy freedom... Freedom from having to spend your time earning an income at a job rather than spending your time following your passion.
Shockingly, 87% of the world population is shackled into a job that they aren’t engaged with. That’s over 6 billion people who come home exhausted from work, wishing they could spend their day doing something else. If you already had all the money you needed to be happy, you wouldn’t have to work, and that’s the freedom that money can buy. That’s what your Freedom Fund can buy you.
A Freedom Fund is a concept that Tony Robbins talks about in his book “Money, Master the Game”. It’s an investment portfolio that you don’t touch no matter what kind of short term financial needs you have. This Fund will eventually grow to hit what Robbins calls a “Critical Mass”. Your Critical Mass is the total amount of money that you need to invest in order to sustain your life. It’s the point at which you can stop working.
It’s the point at which you’ve earned your freedom.
The great thing about capitalism, is that if you have money, you can put it to work for you. You can reasonably assume that you could earn 5% interest on your Freedom Fund over time without taking on much risk. That means that if you want to earn $70K per year (which is the point where most families don’t need anymore income to increase happiness), you just need $1.4 million invested and that $1.4 million will never go away!
It works just like an endowment. Take Vanderbilt University for example. They received $1 million in 1873 to start the university and they’ve now grown it to $4.1 billion as of 2017. That original $1 million never went away, in fact it grew, because they didn’t spend it all at once. The school just took part of the interest earned from that $1 million as the money they could use to invest in the school. Now, if they take out just 5% interest earned, they have $205 million to spend every year without needing to take any money away from their lump sum of $4.1 billion saved up.
Here’s what you need to do in order to create a Freedom Fund:
1. Figure out what freedom means to you.
At what income will you be happy and need no more? One of the biggest problems with people and money is that most people never have enough. If you fall into this trap, you’re going to struggle with being happy with what you have. The key to happiness is gratitude, so if you can’t determine at what point you will stop wanting more, you will never earn freedom. Imagine yourself free and figure out how much it’s going to cost to get you there. Typically it’s a lot less than what you actually think it is.
2. Calculate Your Critical Mass
Your Critical Mass is going to be 20x what you want to earn each year (assuming 5% interest on your investments). If you’re thinking that your Freedom Fund is going to be more of a retirement plan and that you actually only need it to last for a certain amount of time, then you can actually withdraw from the principle each year. In that case, you should calculate your Critical Mass using an annuity calculator.
Lets say you want to withdraw $70K per year, but you only think you’re going to live for another 30 years, what’s the minimum amount of money that we would need? In order to calculate your Critical Mass, set your monthly withdrawal to $5,833.33 (equal to $70K / year) and let’s set the “Annual Growth Rate” to 5%, which is how much interest you will have from your investments. Now set the length of the annuity to 30 years. If you did it right, your Critical Mass should come out to be $1,091,169.33.
3. Automate your investments.
The easiest way to start getting into the game of investing is to use an app like Acorns. Acorns will allow you to automate withdrawals from a bank account and it will also help you figure out exactly how much money you need to invest each month in order to hit your critical mass in time. Let’s say you want a $70K pension throughout retirement. If you’re 25 and you want to retire at 65, all you need to invest is $170 a month and you’ll get to $1.4 million in savings assuming you earn 6% interest (which is pretty conservative). By automating your investments, you never see that money in your bank account. You will then adjust your spending accordingly and as long as you never withdraw from your Freedom Fund, you will guarantee that you will be free at the time you set for yourself. Although Acorns is a great way to get started, make sure that you meet with a financial advisor once you start to have a significant amount of money saved up.
4. Start now, start young.
One of the biggest pieces of advice when it comes to investing is to start young, because then you really see the benefits of compounding interest. To explain the importance of starting early, let’s look at the story of two twin brothers. Jim and John. Jim started investing $4,000 per year when he was 20 and continued to invest that much for the next 20 years when he turned 40. At 40 he left his account to grow at 10% interest without any additional investments. John on the other hand, didn’t start investing until he was 40, but he kept at it for 25 years until he retired at 65 years old. He too, earned the same 10% interest rate as Jim. Overall, Jim invested a total of $80,000 and John invested a total of $100,000, but who had more money in the end? You probably guessed it right, Jim! But by how much?? 600% more money! Jim ended up with almost $2.5 million while John ended up with less than $400,000. That’s the power of starting early.
5. Adjust your Critical Mass to Meet Your Standard of Living
Over your lifetime your income is going to rise. With it, so will your standard of living. Let’s say you’re currently earning $70,000 per year, and so you set your critical mass target to $1.4 million. But you’ve been working really hard and now you got a promotion. Your new standard of living costs you $100,000 per year. When you retire you don’t want to go from a $100,000 per year standard of living back down to your old $70,000 standard. You want to make sure you adjust your goals so that doesn’t happen. Now your new critical mass goal should be $2 million.
This strategy works really great for young people. Let’s say you’re 22, you just graduated college and you’re earning $40K per year (Congrats!!). You may struggle to save $170/week. That’s going to be tough for someone earning $40,000 per year, especially after taxes and living expenses. Rather, you just need to invest enough now to keep up your standard of living when you retire. Right now your standard of living is at $40,000 per year, so you just need to invest $90 per week in order to keep up that standard of living when you retire. Eventually when your income goes up and your lifestyle standard increases, you can increases your investments alongside it. That will keep you from having to invest more than you can afford while your income is still low. The goal here is just to never go back in time. Never force yourself to decrease your lifestyle standards, just make sure when you get a raise, you change your automated payments each month to reach the new critical mass by your target date.
If you follow these five steps, you will guarantee yourself a life where you can be free from having to work. If you want to expedite your freedom, earn more, invest more, and set your goals higher. Increasing your income is just a matter of increasing your productivity and your creativity. The other way to earn your freedom is to start a business doing what you love. Then every day you will be free because you won’t be forced to work, you’ll decide to.