One of the most helpful conversations with friends and colleagues is how much money you need to be able to live without working. How many times have they gotten into the debate? And what have they answered? Well less than they think.
I have found empirically that most people think that we really have to be millionaires in the strict sense of the word. Millionaires in euros, not in the old pesetas. We must have several million to become what in our head is to be a rentier, and in financial logic it is to move our assets to be able to live on it.
It amazes me that we have so little knowledge of what the calculation of our financial freedom is, regardless of the fact that everything goes by how aspirational our needs are. And here I always remember a phrase from my grandmother who said that it is not the richest who has the most but who needs the least.
I use a Yale University study from a few years back to calculate financial freedom. In order to achieve it, 4% of the patrimony that is had for current expenses is deducted each year and it is agreed that with the same money, capital returns of 7% per year must be achieved.
The work of the American university starts from periods in which fixed income has offered a higher interest, so that most of the profitability must be achieved today with higher risk assets. 7% is in line with the historical growth of the benefits offered by the exchanges. And it is the backbone of a long-term investment that is based on doubling the equity every decade at the rate of compound interest of that 7%.
With the Yale University study under his arm, the excel supports that 750,000 euros are enough to achieve financial freedom. These 750,000 should generate a little more than 50,000 euros of interest the first year and an income of 30,000 euros per year would be obtained.
In forty years the savings would be 2.4 million and we would live on 93,000 euros.
Logically we are talking about not having to pay mortgages or bills, only money to live. In a decade, the assets would exceed one million and the money for annual current spending 40,000 euros. In twenty years the patrimony would be 1.37 million and the pay that we would assign to ourselves of 53,000 euros. In forty years the savings would be 2.4 million and we would live on 93,000 euros.
With one million euros we have 40,000 euros left for the day-to-day of the first year. After a decade this amount will approach 54,000 euros and the assets under management to 1.4 million euros. In twenty years, the assets would be 1.82 million and the pay that we would assign 71,000 euros. In forty years the savings would be 3.2 million and we would live on 124,000 euros.
There are many kinds of freedoms (opinion, thought, circulation, religion …) while reflecting on the financial one.
* Joaquín Gómez is deputy director of ‘elEconomista’.
Years of reconciliation with value are coming
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