Since this book is about financial freedom, it’s important to understand exactly what we mean by that.
The “25 times” rule
There’s a rule of thumb which says that if you withdraw no more than 4% of your invested savings each year, it’s statistically unlikely you’ll ever run out of money.
Viewed another way, once you’ve saved 25 times your annual expenses—you are financially free!
Say you want to stop working, and need $120,000 per year to cover your expenses. In this case you’d need to save $3 million to achieve financial freedom. If you could live on $40,000 per year, you’d only need $1 million. Say you’d like to change careers and $10,000 of annual income would give you the cushion to do that, then you’d need $250,000 to achieve financial freedom.
It worked for me
At age 20, I began saving and investing a large portion of my earnings—income initially from a job at a grocery store, later from a job at a restaurant, and finally from my first job as an engineer.
Over the subsequent 15 years, my investments earned an annualized return of 11%. By age 35, those investments had grown enough to provided the freedom I needed to quit my job and finance a new business—which ultimately allowed me to live where I wanted, doing the work I love.
It all starts with saving
For most people, like myself, achieving financial freedom requires the consistent and disciplined saving of a large portion of their income, coupled with the growth that can be realized through investing.
If you commit to saving, the following chapters will teach you how to invest those savings, including concepts which are powerful enough to turn even modest savings into surprisingly large amounts of money.