What is financial freedom? Coast FI, Lean FI and Fat FI
Financial freedom is the point where you no longer have to work to pay for your life. Your savings and investments produce enough regular return to cover your expenses. You can keep working, but you no longer have to.
How much do you need?
The best-known approach is the 4% rule. It says that if you withdraw 4% of your savings each year, your money will last for many years. Turned around, it gives a simple calculation:
Target savings = annual expenses × 25
If you spend $3,000 a month, your annual expenses are $36,000. Your target is about $900,000.
The 4% rule is an assumption based on historical US market data. People who want to be more careful use 3.5%, which means roughly 28.5 times annual expenses. In countries with high inflation, it is healthier to run the numbers with real (inflation-adjusted) returns and in a stable unit such as dollars or gold.
Stops along the way
Financial freedom is not a single line but a series of stops.
One year of freedom. You have savings equal to one year of expenses. If you lost your job or wanted a break, you would be fine for a year. For most people this is the first big milestone.
Coast FI. Your current savings are enough to grow to your target by retirement age even if you never add to them. From here you only need to earn enough to cover current expenses.
Lean FI. Enough savings for a simple life, about 70% of your target. Basic expenses are covered, but you may still need income for luxuries.
FI. You can sustain your current standard of living with withdrawals from your savings.
Fat FI. About 150% of your target. A wide safety margin for plenty of travel, big purchases and the unexpected.
How long does it take?
What determines the timeline most is not your income but your savings rate. Someone saving 10% of their income and someone saving 40% can be decades apart. A high savings rate does two things at once: it speeds up saving and it shrinks the target you need.
So the first step is usually to see your spending and measure your savings rate. Higher income, paying off high-interest debt and regular investing also shorten the journey.
Where to start
- Know your monthly expenses. Not a guess, but the real average of the last few months.
- Pay off high-interest debt. Card interest is higher than the return on most investments.
- Build an emergency fund. Three to six months of expenses.
- Raise your savings rate step by step. Add part of every raise to savings.
- Track your progress in a stable unit. When inflation is high, numbers growing in local currency can be misleading.
In short
Financial freedom is a number: roughly 25 to 28 times your annual expenses. Every stop on the way gives you a little more freedom of choice. Which stop are you at? The Financial Map test estimates it in two minutes.
This article is for general information only and is not investment advice.