The financial freedom scale – What´s your financial dream level?

In Tony Robbins book “Money: Master the game” he made a chapter showing the different levels of financial freedom dreams. A common mistake that people do is that we believe we need a lot more than we actually need to become financially free.

The financial freedom scale:

  • Financial security
  • Financial vitality
  • Financial independence
  • Financial freedom
  • Absolute Financial freedom

Financial security

I have written about financial security before and when you reach financial security you will have all your basic living costs paid for by passive income from your income producing assets. How awesome would you feel if you never again would have to worry about paying for rent/mortgage, food/household costs, transportation, insurance and electricity/water/phone bills?

Wouldn´t it be a huge relief to never ever in your life have to worry about paying those bills again?

So now, let’s figure out the investment amount needed to achieve financial security. How much money do you think you need to never ever have to worry about all the basic thing again in your life?

Make a guess then we start counting.

First we need to calculate the costs. Of course this is very different from household to household and depends on many different things including how many family members and where you live etc.

Here I will give an example of living costs that I think is pretty average for a one person household in Sweden:

Rent/Mortgage: 650€

Food/household costs: 250€

Transportation: 200€

Insurance: 100€

Electricity/water/phone: 150€

= 1350€ per month times 12 months = 16200€/year

So, how much money do we need to have invested to make 16200€/ year in passive income?

Let´s say we spread the risks and diversify in different types of assets that will over the long term have a stabile average return at 8% per year. To calculate the investment amount needed we will divide the amount we want to get by the percentage we expect in annual returns, so 16200/0.08 = 202500€

What was the magic number you thought about before?

I bet it was more than 202500€. So if we can average a annual return of 8%, the price for financial security for the rest of your life is just above two hundred thousand euros.

How about if we instead can average a return of 12% per year what is the magic number then?

16200/0.12= 135000€

Does it seem impossible if you put your mind into it to get together 135000€ in a 5-10 year period?

If you can figure out a way to save up 600€/ month with 12% annual returns on your investments, you´ll be there in less than 10 years, if you start from zero.

Now either you can figure out a way to make 600€ extra per month, cut some spending, maybe a bit of both or figure out a way to get even higher returns. There are many ways to go.

The best way to start and to ensure you will be able get your financial security is to start paying yourself first. This is a simple principle that is probably the most effective of everything in the beginning of your journey towards financial freedom. Paying yourself first simply means “Do not save what is left after spending, but instead spend what is left after saving”. Most people simply pay their bills, and live the month and then they see what is left and save that (usually nothing or a very small percentage). The principle of paying yourself first simply means that you put aside the money for your future freedom the first thing when get your salary, preferably 10-30%. Now, you might feel that you “can´t afford that”, why even think like that? Aren´t you worth at least 10% of your salary? After all it´s you that has worked hard for it, I think that you should be the one that get paid first, don’t you?

Financial vitality

This level is a checkpoint on the way to financial freedom. Financial vitality means that you add half of your luxury lifestyle expenses to the financial security sum.

To calculate the passive income needed add half the cost of the following to the annual amount needed for financial security:

Clothes, cable TV, vacations, dining out, alcohol, hobbies and all other luxuries that we spend money on to make ourselves feel better.

How great would it feel to have all that paid for plus all your basic costs of living, for the rest of your life and never have to worry about it again?

Working halftime enjoying a better lifestyle and still have a lot of money over every month sounds pretty awesome to me.

Financial independence

Congratulations, at this level you have all of today’s living costs covered by passive income. For most people the amount of passive income should be about the same as their income from work since most people spend all their money each month. Now you can choose to work or not to work, spend time on your terms.

Financial independence means that money is now your slave and you are not the slave to money anymore.

As said, the amount needed to be financially independent might be really easy to figure out, since most people spend as much as they earn, sometimes even more.

So, what is your financial independence number?

Now when you know this magic number you just divide it by the percentage of returns that you expect to get and voila, you have the price of financial independence. The price to end money slavery.

So what´s next? What would happen if you started dreaming even bigger?

Financial freedom

While financial independence is about freeing up your time so that you can spend it as you like, financial freedom is about freeing up your lifestyle. Financial freedom would mean you´re independent, you´ve got everything you have today, plus two or three significant luxuries to add to your lifestyle. Things like a luxury boat, an awesome mansion to live in, a luxury car or maybe a second vacation home.

To get to this level you need to ask yourself what kind of annual income you need to get the lifestyle you want and deserve. What do you want the money for? Is it money to travel? Do you want a bigger home? Maybe you´ve always dreamed about a luxury boat or luxury car? Or maybe you want to make a lot of money so that you have more to give for different charities?

How much annual income would you need for those dreams to come true?  300.000€? 500.000€?

Let´s say the annual cost for the dream lifestyle you want would be about 500.000€. That means if you can figure out a way to make 12% annual and have about 4.200.000€ of invested capital you´re there, for the rest of your life. That is not a onetime thing, this is a lifestyle change. Of course this is not something that everyone will have the ability to achieve as with the first three levels, but with the right attitude and big dreams, we can all go a long way.

Absolute financial freedom

Can you imagine how it would feel to be able to do whatever you want whenever you want?

How would it feel if you and your family could have everything that you ever wanted?

Or if you feel like me, if you could have enough to help millions of people in need, become a philanthropist and start different charities for things that you care deeply about.

The only limits to what’s possible is your imagination.

You know the drill already, figure out how much everything would cost per year and then divide it by the percentage that you expect to get over time, that way you can figure out how much you would need for your Absolute financial freedom.

What do you want from life?

That is the question that everyone should ask themselves. Take a moment and really think what you want from your time here on this planet. Most people have the ability to reach the first three levels, most people can live a life in freedom if they really want to and learn how to get there. It´s not hard, it´s not rocket science. Getting to the first three levels of financial freedom is just about consistency and putting aside a portion of your salary every month for automated investments that will do the work for you over time. Even if you don´t really care about getting filthy rich, you might feel that you want to help people in need and create social businesses. The more we have, the more we can give, never forget that.

What should I do now?

This question is the most common one after seeing and understanding all this. How can I do this?  Where should I start?

The answer is simple. Start by figuring out what it is that you really from life want. Start paying yourself first and think about ways that you can start increasing the monthly amount that you put into your freedom account. Learn about different investments, read books, continue to read this blog, sign up for my E-book, don’t feel scared to lose money but be sure to learn from mistakes that you make so you only do them once, read this article i wrote about creating passive income streams.

Just by reading this post you are one step closer to financial security because now you know that what you need to get there isn´t really that much. You know how to calculate your different financial freedom levels and you know how to take your first steps towards the life of your dreams.

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