Today's video is all about
step three of my five by two
financial freedom framework.
I am Tiffany Thomas with
wealthy tiffany.com
and I achieved financial
freedom and became a
millionaire.
If you're looking to do one or
both of those things,
make sure to hit that like
button and hit the subscribe
button.
And we're going to dive right
in.
Recently,
I shared an overview of my
entire five by two financial
freedom framework.
So in today's video,
we are going to go over step
three in that framework,
which we are going to talk
about why you don't want to
move forward without doing
these two things first.
And then we are going to talk
about the two things you're
going to need to figure out in
order to know where you are
going on your path to
financial freedom.
And then we're going to talk
about how to figure those two
items out.
And then I will share my
example and what made the
biggest difference for me.
So step three in my framework
is all about where you are
going.
So we are going to talk about
first,
our financial freedom number,
and then second,
when you want to achieve
financial freedom.
So those are the two main
items we are covering in
today's video.
If you don't know where you
are going,
how will you know when you get
there?
You won't.
You need to decide exactly
where it is you are headed,
where you are going,
where do you see yourself in
five years,
and 10 years even.
So we need to figure out
exactly how much it is going
to take to become financially
free.
The way we are going to do
this is by calculating our
financial freedom number.
And all this means is that
we're going to take our annual
expenses in retirement years
and multiply that number by
25.
And if you're not sure exactly
how much you are going to be
spending in retirement,
that is totally normal because
we don't know exactly how much
we will spend,
but we can get a pretty good
estimate.
We can take a look at our
expenses currently and decide
if it will be pretty close to
that amount.
Or maybe we have a mortgage
that will be paid off when we
retire,
or we have a car loan right
now,
and maybe that will be paid
off when we retire.
So we could reduce our
expenses by those amounts,
but in your later years,
even if you are retiring
early,
but when you are older,
you're probably going to have
a higher medical expense.
So just figure out a rough
estimate on how much you think
you'll be spending each year
in retirement,
and then multiply that number
by the number 25.
For example,
if you think your expenses are
going to be $50,000
per year,
you will multiply 50,000
by 25.
And that will give you 1.25
million.
So that is the amount of money
you would need to have
invested in order to become
financially free or retire
early.
It's not the money that is
sitting in your savings
account,
but the money that is invested
that is working for you
because you will start pulling
that money out of your
investment accounts,
but it still needs to be
working for you.
So in case you haven't noticed
savings rates are really,
really low,
even though they've gone up a
little bit recently,
they are still around maybe
1%,
probably less than 1%.
So that is not making your
money work for you.
If you have your money
invested in the stock market,
especially in the stocks or in
an index fund that has a bunch
of stocks inside of it,
that is going to make your
money work for you.
The reason we are multiplying
our annual expenses by the
number 25 is because of a
study that was done,
it's called the Trinity study.
And you can actually Google
this and find a lot of
information about the study.
But I found one that is an
updated study.
They originally did this years
and years ago,
but the one that I want to
show you is this graph.
So if you have 100% of your
investments in stocks,
whether that's individual
stocks or in a stock fund,
and if you want to know what
my favorite index fund is,
I have a video about that.
I'll leave a link above and
below.
You can check that out later
on.
But if we have our money
invested a hundred percent in
stocks and we are retiring
early,
so we want this money to last
50 years and we are going to
use a 4% withdrawal rate,
which means you can take your
annual expenses,
multiply that by 25 and then
be withdrawing about 4% every
year.
And this is adjusted for
inflation.
So depending on where
inflation is at,
you may be able to withdraw
more than 4% or less than 4%,
but it is adjusted for
inflation.
So over that 50 year time
span,
you will have over a 90%
success rate,
which means your money will
last you until you die.
As long as that is within
about 50 years from when you
first start taking your
investments out.
So those are some pretty good
odds.
And if you want to be even
more careful,
you could reduce your
withdrawal rate to 3.5%
or some people even go to 3%.
I feel pretty comfortable at
4% because of this graph.
And because I know I can be
flexible over the years since
I did retire early,
I can get a part-time job if I
am really seeing my
investments decline one year,
or I can start some sort of
side hustle or just think of a
few ways to increase my income
a little bit and make up for
any lack that the stock market
might be having one year.
So realize this is not the end
all be all.
This is the exact amount,
withdraw 4% every year,
and everything is just fine.
You'll have to keep an eye on
your investments,
but it is a pretty good
estimate.
And if you don't feel
comfortable having a hundred
percent of your investments in
stocks during your retirement
years,
you could reduce that amount
to 75% in stocks and still
have a really good success
rate.
You can see from this chart
that the orange line is a
hundred percent in stocks.
So that is the line that's on
top.
And then the next color is
green.
And that would be 75% invested
in stocks.
And then you could put
twenty-five percent in bonds
and you would still have a
really high success rate at a
4% withdrawal rate.
That's still around 90%.
So figure out what your
financial freedom number is
and comment below and tell me,
I know my financial freedom
number,
if you have figured it out.
And then the second part of my
step three in my five by two
financial freedom framework is
figuring out when you want to
become financially free.
And I put a link to a
calculator in here so that you
can play around with your own
numbers and figure out your
exact amounts.
It's net worthify
dot com slash calculator.
Now that we know our financial
freedom number,
the amount we need to have
invested,
we need to know how much we
need to be investing every
single month in order to
achieve that number in a
certain timeframe.
And like I said before,
you want to keep a lot of your
money in stocks,
even though that may seem
risky,
but that's where your
investments are going to grow.
If you have your money
invested in bonds,
it's more about preserving
your wealth instead of growing
your wealth.
So let's take a look at an
example that I put in this
calculator online.
I gave the example of someone
at the age of 35,
and let's say that they are
making a $55,000
per year,
and they have an annual
savings rate,
and this would be the money
they're investing,
not putting in a savings
account.
That annual savings rate as
they call it is 10%.
And then I have that they
already have $82,500
invested in the stock market.
So that could be in a 401k or
in a Roth IRA or traditional
IRA,
or even in a brokerage
account.
And if you're not sure what a
brokerage account is,
or the benefits of having a
brokerage account,
I break it all down for you in
another video,
I'll leave a link above and
below.
So for the rest of this
example,
they can retire in 31 years by
having a savings rate or
investing 10% of their income
every single year.
So they would be able to
retire at age 66.
And that would mean they would
need to be contributing $417
per month to retire by age 66.
So you can probably guess if
they are investing more than
$417 a month,
they're going to be able to
retire sooner,
which is why it was really
important to invest as much
money as possible as soon as
possible so that you can reach
that financial freedom number.
And I do want to say it is not
all about the money,
right?
It is about the option of
quitting your job or staying
at your job,
but it's not because you would
need to stay at your job for
the money.
It would just be because you
wanted to stay at your job.
You enjoy what you're doing.
You can go to this calculator
and input your own numbers and
see when you can retire if
you increase your investment
amount.
Comment below and tell me if
you have used this calculator
or a calculator like this one.
And then,
like I said at the beginning
of the video,
I wanted to share my example
of becoming financially free.
So at age 36 is when I heard
about FIRE,
financial independence retire
early.
I saw a lot of people that
were retiring and they figured
out exactly how much they
would need to retire.
And I was so impressed with
this because I remember
sitting in my,
in the lunchroom at my nine to
five job with another
coworker,
and we would talk about how
much we were going to need to
retire.
And we had no idea.
We didn't know if it was a
million dollars or 2 million
or 5 million.
We had no clue.
So once I found the FIRE community,
I was super excited that there
was actually this formula to
figure out exactly how much I
would need to retire.
Once I figured this number
out,
I also discovered that if I
had passive income coming in,
or even semi-passive income,
that I could reduce my
expenses by that certain
amount.
So if I had an extra a hundred
dollars coming in every single
month,
then I could reduce my annual
expenses by $1,200.
I already had three properties
by this time.
So I had some passive income
or semi-passive income since I
manage my own properties
myself.
But if I wanted to get a
property manager,
then I could afford to pay for
that and still be financially
free.
Since I figured that out,
I reduced my annual expenses
by the amount that was coming
in from each of my properties.
And I figured that if I was to
purchase one more property,
then that would put me at
financial freedom.
So that is exactly what I did.
I purchased my fourth property
at age 37 and it was right
around my birthday.
So when I got my official
tenants in there,
I became financially free at
age 38.
And typically,
yes,
I did retire at age 36,
since that is when I
officially quit my nine to
five job,
but I just kind of looked at
it that I didn't have enough
cashflow coming in at that
time.
But once I purchased my
property and had tenants in
there,
then at age 38,
I had that amount of cashflow
that covered my full annual
expenses.
So that's why I say that I
became financially free at age
38,
even though I quit my job at
age 36,
but I never got another
full-time job or even a
part-time job.
So for me,
real estate made the biggest
difference because like I just
said,
it created that cashflow for
me.
I had rental income coming in
every single month to cover
all of my expenses.
If you want to retire early,
it's not just about investing
your money.
It's also about creating that
cashflow,
the amount that we're going
to live off of.
And for me,
it was easier to do that with
real estate properties because
I was collecting the rental
income every single month.
And yes,
of course,
you can do this with the stock
market and you can use even
dividends that you might be
receiving every single month,
or you can cash out your stock
market investments,
or you could even use
something called a margin loan
and borrow against your
investments.
And I discussed that in
another video.
So I'll leave a link to that
above and below.
So for me becoming financially
free,
real estate is what made the
biggest difference.
Although my stock market
investments did help out
greatly because I cashed money
out of my Roth IRA,
the amount that I contributed,
and also money from my
brokerage account in order to
come up with part of the down
payment for my fourth
property.
So figure out what is going to
work for you,
whether that is just the stock
market,
or maybe it's just real
estate,
or maybe it is a combination
of both,
or maybe it is investing in
your own business or in
someone else's business.
And if you want to hear about
the first and second steps in
my five by two financial
freedom framework,
I will leave links to those
videos in the description
below.
Plus the link for an overview
of my entire five by two
financial freedom framework.
If you found this video
helpful,
please hit that like button
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thanks so much for watching.
I'll see you in the next
video.