Many people hope to save up a certain amount of capital, and then use the money to make money in a safe and reliable way, so as to achieve financial freedom and live a comfortable life in early retirement.
But most people don’t know how much money they need to save to achieve financial freedom, nor do they know how to manage their funds.
Next, I will tell you how to calculate your own wealth freedom threshold, and how to manage your finances more safely and reliably and obtain a better return.
The so-called threshold of financial freedom is the minimum deposit amount you must have, calculated based on your actual assets and consumption.
We must remember that everyone’s demands for living conditions are different, so the threshold for financial freedom is also different.
Let me give you two extreme examples.
Suppose a person lives in the center of Shenzhen, wants to live in a large detached villa, has four elderly people at home who need care, has three children and sends them all to elite education, and will arrange for them to immigrate abroad in the future.
Each person in the family has a car, and the car is replaced every five years or so.
The old man likes to travel abroad, the wife likes to buy luxury goods, and the children’s hobbies are all taught one-on-one by top teachers in the country.
We also hired three nannies to take care of the daily life of the elderly and children, and one full-time driver to drive them around.
How much money does such a family need to achieve financial freedom?
Don't ask me, I can't calculate it either. Poverty limits my imagination and calculation ability.
Let’s assume another person lives in a small county town in the 18th tier, doesn’t like going out, and therefore doesn’t need a car.
There are no elderly people in the family, and I don’t plan to get married, let alone have children. If one person is well fed, the whole family will not be hungry.
I don’t have any spending habits. At most, I spend money to buy some skins when playing games at home, and then I buy memberships for some video and novel apps.
Eating is also very casual. You can find a noodle restaurant downstairs to have three meals a day.
How much money do you think he needs?
It sounds outrageous, right? You must be wondering: Can living like this be considered financially free?
In fact, it can be counted, because his needs are so little. As long as the passive appreciation can cover all his needs for money, it counts.
As long as he feels that his life and mental state are free and comfortable, that's enough.
Of course, for the following example, it is easy to have a misunderstanding: Can I easily achieve financial freedom as long as I control my living costs low enough?
no.
The same living conditions can give different people completely different feelings of happiness.
Maybe for a very small number of people, this is the kind of life they want, and it is the result of their active choice and their willingness to accept it:
He just doesn't want to get married and prefers to live alone; he just doesn't like the hustle and bustle of big cities and prefers to be stress-free in a small place;
He is not picky about shopping and eating. He has no interest in luxurious meals, but he has a special liking for cheap and delicious street snacks...
The vast majority of people do not want to live this kind of life.
We may live like this passively for various reasons, but it is not financial freedom because it is not the life you want.
We can use a more appropriate word to describe it: low-desire life.
In the late 1990s, after the bursting of the Japanese real estate bubble, a large number of young people passively began to live this kind of life, leading to the prosperity of otaku culture, which was called Heisei otaku.
Their lives and financial freedom have absolutely nothing to do with it.
Remember, a life of financial freedom is based on a living condition that you consider to be relatively comfortable.
This state cannot be tight, otherwise you will not be able to endure the emptiness of being unsatisfied for many years;
You cannot indulge in luxury, otherwise no amount of money can satisfy your ever-growing desires.
After sorting out the above logic, let’s first calculate all the expenses for the rest of your life.
The first step is to calculate the major expenses you need to pay, including house, car, medical care for immediate family members, children's education expenses, etc.
The house should be designed based on the standard of where you want to live comfortably for the rest of your life.
For example, if you own a house in a second-tier city, but you want to live in a first-tier city in the future, you must calculate the price difference and include it in your expense statistics.
Or if you still have a mortgage to repay, you will need to pay off the mortgage in one lump sum, or calculate the remaining mortgage and interest as an expense statistics.
The car should be calculated based on its own needs, taking into account the replacement cycle and subsequent vehicle usage needs.
For the medical expenses of immediate family members, each person should set aside a budget of 10,000 yuan each year; in addition, the whole family needs to have 500,000 yuan in flexible funds in case of emergencies.
The education expenses for children can be calculated according to the actual situation of each family. The difference in amount between different routes is also huge.
All the fees calculated above must be deducted from your total deposit amount.
Let me give you an example to make it easier for you to understand.
Suppose you have 10 million, but you plan to spend 1.5 million on improving your home, 500,000 on buying a car, and 1.5 million on a child's private school and work expenses. A family of five people will need a total medical budget of 2.5 million in the next 50 years, totaling 6 million.
Then, the capital you can use to make money is not 10 million, but 10 million-6 million=4 million.
The second step is to calculate your family’s average annual expenses.
It would be best if your family has the habit of keeping accounts. You can compile statistics on the regular expenses for the past five years to see the average monthly expenditure, the difference between the upper and lower limits, and the average growth trend.
If you are not very good at calculations, you can directly put the data into an EXCEL table and use the table to generate a line graph, which will look more intuitive.
If you can't calculate your own cost of living expenses, there is a simpler way, which is to directly look at the average salary data in your city.
Taking an ordinary family of three as an example, if there is no special spending need, they only need 3-4 times the average urban salary every month to have a relatively comfortable quality of life.
For example, if the average salary in your city is 5,000 yuan, then your family needs to have 15,000 to 20,000 yuan in passive income every month, which means 180,000 to 240,000 yuan in interest income per year.
The third step is to calculate all the expenses of your family for the next three years (except the major expenses already calculated previously).
The reason why you need to calculate this amount of money is that it takes a period of time for you to put money in the bank to generate interest, usually 3-5 years. During this period, you will not get any interest, so you need to set aside the expenses during this period.
Why calculate for 3 years instead of 5 years?
Because we need to allocate the financial funds, save part for 3 years and part for 5 years. In this way, after 3 years, you will have interest income to cover your living expenses; after another 2 years, your 5-year financial income will be credited to your account; after another 2 years, your second investment of 3-year financial income will be credited to your account...
Isn’t the perpetual motion machine of wealth starting to turn?
Now, let's see how much interest we can generate every year if we keep our money in the bank.
According to the deposit interest rate table for 2023, the one-year interest rate is 1.75%, the two-year interest rate is 2.25%, the three-year interest rate is 2.75%, and the five-year interest rate is 2.75%.
But since you are considering financial freedom, the money you have on hand must not be too little.
At this time, you should go to a large bank and make an appointment for a large-denomination certificate of deposit. There is a difference in the interest rate between a large-denomination certificate of deposit and a direct deposit.
Taking the Bank of China's large-denomination certificates of deposit as an example, with a minimum deposit of 200,000 yuan, the three-month interest rate is 1.595%; the six-month interest rate is 1.885%; the one-year interest rate is 2.175%; the two-year interest rate is 3.045%; and the three-year interest rate is 3.85%.
You see, the interest rate of the 3-year large-denomination certificate of deposit is directly 1.1% higher.
The interest rate of ICBC's 3-year large-denomination certificate of deposit is even higher, at 4.125%, which is close to the yield of 5-year treasury bonds.
Careful students have discovered that it can also be used to buy government bonds!
The yield of a 5-year treasury bond is usually between 4% and 5%, which is a very safe and profitable way to manage your finances. The so-called treasury bond is equivalent to the country borrowing money from you for development, and then cashing in the principal and interest to you after maturity.
We can be a little more flexible and allocate the funds that can be used for long-term financial management, using half to buy five-year government bonds and the other half to place large-denomination certificates of deposit in large state-owned banks.
On average, we can get at least 4% annualized rate of return, so we will calculate it based on 4%.
Now, we can officially calculate our own threshold of wealth freedom.
First, divide your family's average annual expenses by 4% to get the principal amount you need to buy government bonds and deposit large bank certificates of deposit.
Taking a family with an average monthly expenditure of 15,000 yuan as an example, the annual expenditure is 180,000 yuan, which divided by 4% is 4.5 million yuan.
In other words, according to the financial management method of treasury bonds + large-denomination certificates of deposit, a principal of 4.5 million yuan can generate an average annual interest income of 180,000 yuan.
Next, divide your living expenses budget for the next three years into three parts.
Keep one copy in the payment app you use daily for easy access at any time within a year; deposit the other two copies in a bank, choose a one-year term, and you can withdraw them in advance when necessary, with only a small loss of interest income.
The purpose of doing this is to facilitate daily use, and at the same time set a low threshold for bank withdrawals to avoid spending money lavishly beyond your budget.
Taking an annual expense of 180,000 as an example, 180,000 would be placed in the mobile payment software and 360,000 would be deposited in the bank for one year.
Finally, take out the major future expenses you calculated and make a separate plan.
Suppose you have reserved 1 million yuan for housing improvement, but do not plan to improve it within the next five years, you can use the 1 million yuan to buy five-year government bonds.
When it expires, you will have an extra $200,000 in funds, and you can then increase the budget for home improvements to $1.2 million, which you can use as you please.
The same goes for cars and children's education expenses. Plan the time when you need to use them and manage your finances appropriately before using them. The gains from the appreciation will give you more options.
For example, if you plan to change your car several times in the future, you will need a total of 500,000 yuan; if your child goes to an ordinary public school from childhood to adulthood and graduates from college, a total of 200,000 yuan will be enough.
In the short term, you won’t need or will not need that much of this money. If you use it for financial management to generate returns, you can buy a better car or send your children to a better school.
But this is not the case with family members’ medical reserve funds.
A family needs to set aside 500,000 yuan in flexible cash and put it in a separate bank card for survival. It can be taken out at any time for emergencies, but the funds must be used for their intended purpose and should never be used for other purposes.
Let’s briefly summarize.
In the example just mentioned, how much property does this family need to achieve financial freedom that is consistent with the local average living standard?
First of all, the family needs a fully paid house and car (the housing improvement budget and car purchase budget calculated previously will be used for subsequent small-to-large upgrades, maintenance, and upgrades). The total cash needed is 4.5 million (financial management principal) + 540,000 (daily expenses in the next three years) + 1 million (housing improvement budget) + 500,000 (vehicle replacement budget) + 200,000 (children's education budget) + 500,000 (family medical budget) = 7.24 million yuan.
In other words, if an ordinary family wants to achieve financial freedom, the combined real estate and cash of about 10 million yuan is a basic threshold.
It can allow you to live an easy life without having to work to support your family, but it won't allow you to live a particularly rich life.
It should be noted that all our planning methods are based on the current state to arrange the future, which will itself contain many uncertainties, such as severe inflation, war, major changes in the family, and so on.
You need to maintain physical and mental health, exercise more, have a regular schedule, and spend time on your hobbies and leisure.
In addition, don't think that you can sit back and relax just because you have enough funds. Our lives are full of accidents, and even if you have made all the preparations, you may still encounter unexpected events that you cannot resist.
Don't let your financial freedom make you a useless person.
We can choose not to work and earn money because we have the freedom to choose; but we must never lose the ability to make money.
If one day we encounter a major accident, all our savings are wiped out or even we owe a large sum of money, our ability will be a reliable guarantee to save our lives.