When working towards financial independence, your goal is to your passive income to provide you with enough money to live comfortably. But how much money is enough?
Whenever I’m working from the office, I am surprised by the number of people I see going into their day job. Coffee in one hand, phone in the other, walking towards the office (no, that’s not the reason quitting caffeine changed my life).
They are commuting from all parts towards their office job, making money. Yes, most of us really need to work to make money and use that money to build wealth.
But for what?
It is important to have a plan for life and ensure financial security. Start budgeting, start saving, invest some money, and save for retirement.
The thing is, when is that ever going to stop? How much money is enough? At what point can you stop chasing money?
But How Much Money Is Enough?
The moment you decide you should define how much money is enough, is one of the most important financial decisions you can make.
In today’s world, many people are growing up, thinking that there is no enough when it comes to money. All we want is more. That’s why all the rap songs are about money and why the website where you can spend Bill Gates’ money is so popular.
When you chase the empty promise of more, there is one thing you know for sure: you’ll never get there. You can save money all you want; you always want more. It’s like running in a hamster wheel, you’re running as hard as you can, but you’re not moving.
Let’s take an example: you define enough as having 1 million dollars, and your neighbor defines enough as 5 million dollars.
You and your neighbor are talking about investing and start to invest at the same time. You both put $1,000 per month towards your investments, making $12,000 per year at a 7% average annual return.
When you want to work towards having one million dollars, starting at 25, you could hit your goal around 53. When your enough is $1 million, your accumulation phase will look like this:
For your neighbor, who wants to have $5 million before they keep like they have enough money, they could hit that goal when they’re 75. That means an additional 22 years of working to reach that point:
It is important to ask yourself: is that worth it for me? Do I want to spend 22 extra years going after that high (liquid) net worth? Or am I satisfied with a lower net worth?
It’s not all about money either. It’s about the time you spend doing the things you love. Once you’ve spent the time, there is no way you’re getting it back.
[Curious? Check the average net worth in the Netherlands]
Determining Your Priorities
When you’re thinking about how much money is enough, it’s important to know where your priorities lie. Your priorities are what you really value spending money on, and you would never want to cut out of your life.
How can you determine your priorities? You can start by asking yourself these questions:
- What do I really love doing?
- What kind of life do I want to live?
- When I think about my perfect day, what am I doing?
- What is your mission or ultimate goal?
When you have clear where your priorities lie, and what you value, what you want to spend your money on comes naturally.
For example, I don’t value living in an expensive apartment in a big city, so I spend around $400 per month on rent. I value exploring new places and traveling, so that’s where I spend most of my money.
I don’t care about clothing. Well, I have to look decent when I go to the office, but that’s all there is for me. In the past 1.5 years, I didn’t even buy any new clothing.
There are certain basic expenses that I have to keep my standard of living. I don’t want to be depriving myself.
Most months, my spending is below $1,000 – last year, my average spending was $700 per month, including travel. That means I can live in an apartment with my partner, bike to work, eat food I love, travel a lot, and regularly see my friends and family.
For me, it would be enough to be able to spend $12,000 per year and live the life I want.
Where To Start?
If it’s difficult for you to know where to start, there are a couple of basic steps in personal finance that you can take.
First, it’s important to save enough money for an emergency fund. I would advise saving money between three and six months of living expenses, depending on what makes you comfortable. Personally, I have three months of living expenses set aside because I know I can get another job within weeks.
Please write down your financial term goals and work toward them every month. It is important to know what you’re striving for. It will make you motivated to keep going.
Be your own financial advisor in terms of planning your retirement. Retiring early or not, you need to know how much money you need to retire. Retiring is something most people start to think about when they get older. However, with the power of compound interest, the earlier you start, the better!
Things you can plan for is to pay off any debt you may have; this includes credit card debt and student loans. Save more each month, live frugal, earn some extra money, stop living paycheck to paycheck, and you will surprise yourself with how quickly you can pay it all off.
Money management is an essential skill to learn, the earlier you learn it, the better.
Last but not least: investing. Investing is often perceived by people as difficult or impossible in their situation. I don’t see it this way. When you’re saving for the future, investing in the stock market will help you tremendously. Here are 5 simple steps to start investing your first dollar today!
Having Enough For Financial Independence
When you want to know whether or not you have enough for financial independence, you should know how to calculate your Financial Independence (FI) number.
When I want to be financially independent and have $1,000 monthly to live on, I will apply the rule of 25 – also known as the 4% rule. That rule states that you need to have a portfolio of 25 times your annual expenses, so you can withdraw 4% yearly from your portfolio to live on.
This means that you need to have a big nest egg to cover your expenses in this way. This means I would need a portfolio of $12,000 * 25 = $300,000.
Most people base their enough on their current standard of living. Like: “I live in a big city now, paying $2,000 in rent and having a total of $4,000 monthly expenses. When I reach that $4,000 in monthly expenses, I will be financially independent”.
This reasoning may not be so waterproof, simply because your standard of living may change.
Or you can increase your expenses. You can inflate your lifestyle, go out to eat with your friends weekly and spend $100, or develop a sweet spot for expensive cars. There’s no way you can live on that $4,000 anymore.
There may be other reasons for your spending increasing. For example, you can decide to start a family or decide you no longer want to live with roommates.
Increased spending is not a sin, and it’s definitely not always a bad thing.
Don’t Fixate On The Numbers
While numbers can be a great way to track, it is not the end all be all. When you’re fixating on the numbers, you may miss out on other things. The 25x your annual expenses in a goal, not the holy grail.
While the numbers are an important part, it’s how you feel that determines whether or not you have saved enough money.
It’s not about having an X amount of money in the bank. It’s about having freedom in your mind. The freedom to do what you want to do, without having the fears that would come up when you’re working your 9 to 5.
So, How Much Money Is Enough?
When you’re deciding how much money is enough for you, know that you’re not only deciding about money but also about the time it takes you to get to that money. The higher your amount of money is, the longer you will take to reach that number.
If you determine your priorities, you know where you can spend your money to make you happy. The goal is to maximize your happiness and spend money on things that give you joy.
There are many ways you can make enough money to hit your actual number. Even more important is the mindset of having enough. Financial peace of mind is the goal that most are trying to reach when striving toward having enough money.
What do you think, how much money is enough?
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Founder of Spark Nomad, Radical FIRE, Journalist
Expertise: Personal finance and travel content
Education: Bachelor of Economics at Radboud University, Master in Finance at Radboud University, Minor in Economics at Chapman University.
Over 200 articles, essays, and short stories published across the web.
Experience: Marjolein Dilven is a journalist and founder of Spark Nomad, a travel platform, and Radical FIRE, a personal finance platform. Marjolein has a finance and economics background with a master’s in Finance. She has quit her job to travel the world, documenting her travels on Spark Nomad to help people plan their travels. Marjolein Dilven has written for publications like MSN, Associated Press, CNBC, Town News syndicate, and more.