Review of Financial Freedom/ Independence

Developing the Core Financial Habits Series

How to Calculate Your Path to Financial Freedom and Independence

Before you can reach Financial Freedom or Independence, you need to know where those milestones are. You cannot reach a goal you have not defined. In soccer, every team plays with a clear target: get the ball into the net more than the opponent. In your financial life, your goals are Financial Freedom and Financial Independence. Let’s define them in simple terms and walk through how to calculate each one.

What is Financial Freedom?

Financial Freedom is the point where your investments can generate enough income each year to cover your annual living expenses. At this point, you no longer have to work to survive—your investments can pay for your life.

To estimate this number, we use the 4 percent rule, a commonly accepted safe withdrawal rate based on decades of financial research. That means you can safely withdraw around 4 percent of your investments every year without running out of money over a typical retirement.

Formula:

Financial Freedom Number = Annual Living Expenses × 25

We multiply by 25 because 1 divided by 0.04 equals 25.

Example:

If your annual living expenses are $80,000:

$80,000 × 25 = $2,000,000

So in this example, once your investment accounts reach $2 million, you have likely achieved Financial Freedom.

What is Financial Independence?

Financial Independence is the next level. This milestone is when your investments can cover your gross annual income—not just your living expenses. At this point, working becomes fully optional. You have complete agency over how you spend your time.

Formula:

Financial Independence Number = Gross Annual Income × 25

Example:

If your gross income is $120,000:

$120,000 × 25 = $3,000,000

So at $3 million invested, your investments could replace your paycheck entirely.

Why both numbers matter

Think of Financial Freedom and Financial Independence as a range rather than a single finish line.

• The lower end of the range (Financial Freedom): Your investments cover your lifestyle.
• The upper end (Financial Independence): Your investments cover your full income.

Not everyone wants to stop working completely. Some people love what they do but want the option to walk away if needed. Others may only spend a portion of what they earn and therefore need less than full income replacement. Knowing both numbers gives you clarity and choice.

But how do you estimate your living expenses?

To calculate your Financial Freedom number, you must first know what you spend in a year. There are two ways to estimate this:

1. Track every dollar you spend over three months, then multiply by four to get an annual estimate.
2. Use your savings rate. If you know how much you contribute to long-term investments each year, subtract that from your gross income. The remainder is your annual expenses.

Example:

• Gross income: $100,000
• Long-term investments: $20,000
• Estimated expenses: $80,000

Now you can calculate your Financial Freedom number: $80,000 × 25 = $2,000,000.

Once you know your expenses and income, you can calculate your personal Financial Freedom and Financial Independence targets. With those targets in place, you now have a goalpost—a direction to run toward.

Estimating How Long Achieving Financial Freedom or Financial Independence Will Take

Now that you know your Financial Freedom and Financial Independence numbers, the next logical question is: How long will it take to get there? This is where savings rate becomes the most important number in your financial journey.

Your savings rate is not how much you put into a regular savings account. It is the percentage of your gross income that you invest in long-term investment accounts like your 401(k), IRA, or taxable brokerage accounts that you do not plan to touch until you reach Financial Freedom or Independence.

How to calculate your Long-Term Investment Savings Rate

Formula:

Savings Rate = Annual Long-Term Investment Contributions ÷ Gross Annual Income

Example:

• Gross income: $100,000
• Annual contributions to 401(k), IRA, and taxable brokerage accounts: $20,000

Savings Rate = $20,000 ÷ $100,000 = 20%

Why your savings rate matters more than your investment returns

The higher your savings rate, the faster you reach Financial Freedom or Independence. Even if your investments grow at the same rate as someone else’s, the person who saves more wins by years, sometimes decades.

This is because a higher savings rate does two things at once:

1. You invest more money each year.
2. You live on less, which lowers the amount of money you need to be financially free.

So how long will it take?

If you’re just starting out with little or nothing in your long-term investment accounts, you can estimate your timeline using either:

• The “How Savings Rate Impacts Time to Financial Freedom” table from Core Habit #1, or
• Coach Holdren’s S.E.M. Calculator, which provides a year-by-year roadmap and downloadable spreadsheet.

Here are a few examples from the table in Core Habit #1 of how long it will take to achieve Financial Freedom given your long-term investment Savings Rate; assuming the accounts grow at a 5% annual investment return:

Even at a 50 percent savings rate, it still takes about 17 years to reach Financial Freedom and around 25 years to reach full Financial Independence. Why? Because this journey is not about quick wins. It is about discipline over decades.

If you already have money saved in your long-term investments, your timeline will be shorter. But the principle remains the same: the higher your savings rate, the fewer years it will take.

Set realistic expectations

This is a long-term game. The path to Financial Freedom and Independence is measured in years and decades, not weeks or months. Knowing this from the beginning helps you stay grounded, avoid discouragement, and stick with the process even when progress feels slow in the early years.

Next up: Tracking Progress, Live Intentionally, Take Action.

Next we will complete the Developing the Core Financial Habits Series by reviewing Key metrics to track progress, review living with intent and purpose, along with encouragement to take action.