Because once you figure this out and hit the number, you are free. This is “F*** you money!”
In this video I’ll show you not only what nearly all financial experts agree on, how much money is true “F*** you money,” and then, the more complicated thing, how people actually access that money once they hit their numbers.
I’m going to give you two calculations for the F*** you money that are both based off annual expenses.
Part 1: The “Enough” Calculation
Here’s the simple version:
- Step 1: Calculate your annual expenses (be honest)
- Step 2: Multiply by 25
- Step 3: That’s your number
Wait, why 25? This comes from the Trinity Study, which asked the question, “how much can you safely pull out of an invested portfolio every year without it running out?” (here’s the original study). Their answer was 4%. 1/25 is 4%. This is even conservative; recent evidence and most experts say this number is closer to 4.7%, assuming you retire at 65 and live until 95.
This number limit decreases (the % decreases) as you want to do it longer (say retiring at 30 and living for 60 years is closer to 3%) while if you only wanted 20 years, it might be closer to 7%. This is also assuming your costs never decrease and you have no more income.
But, to keep it simple at 4%, theoretically, based on that information, if you live on $40,000 a year, you have “F*** you money” when you hit $1,000,000 (4% * $1,000,000 = $40,000).
This is exactly what Mr. Money Mustache did, retiring around 30 years old. To use myself as an example first I calculate annual expenses:
For me, living in NYC, it’s roughly $80,000/year. That includes:
- Rent
- Food (groceries + eating out)
- Health insurance
- Transportation
- Subscriptions
- Random life stuff
$80,000 × 25 = $2,000,000
That’s my “enough” number if I wanted to live in NYC forever with these expenses.
Now, one fun thing to do, is calculate how much money you would need to live a crazy life. This is the “Dream” calculation which is essentially the same thing but with way higher expenses.
Part 2: The “Dream” Calculation
- Step 1: Calculate your dream annual expenses
- Step 2: Multiply by 25
- Step 3: That’s your number
Let’s have some fun with this:
- House: $13k house US + $12k vacation house: $300k
- Fancy school for 3 kids: $300k
- Staff: $600k
- Private Chef: $150k
- Nanny: $100k
- Assistant: $100k
- Personal trainer and health team: $100k
- Head of staff: $150k
- Travel: $100k
- Dining: $100k
- Misc stuff: $200k
- Philanthropy: $100k
- Private jet: $700k
- 5x National @ $40k = $200k
- 2x IN @ $250k = $500k
Total: $2.2M/year
$2.4M * 25 = $60M
Now, the big question is what do we do with our life? The point of this whole video, and showing you these numbers, is simply to show you the knowledge of what you can likely do when you have $X.
If I want to spend $20k a year, ~$2k/month, I could have “F*** you money” at $500k or, if I want to live a crazy life and spend $1M a year (at least for a little, I just watched Wolf of Wallstreet), I would need ~$25M dollars.
This number just helps you understand how much you might actually need. But say you hit your number in an investment account somewhere, how do you actually spend that money in a tax-smart way?
Part 3: How people actually get the money
For most of us (under ~$10M): Well, for us normies in the less than ~$10M saved range (which is 0.04% of total adults and 98% of Americans), most people have money in taxable brokerage accounts, IRAs, and 401Ks. What the best practice usually is is selling long-term holdings, use tax-loss harvesting, and roth conversion ladder. Works fine, especially if you don’t need much to leave and fall in a lower federal tax bracket.
At $10M to $100M: Those at the $10-100M range usually operate a little differently using things like real estate, donor-advised funds, municipal bonds (tax-free interest), and mega back door Roths in addition to the methods above to pay for their yearly expenses without paying too much in taxes. Please google to learn more.
At $100M+: Because this is a little confusing (but really interesting) let me walk you through this in detail
Around the $100M+ mark things start getting interesting, usually using “Buy, Borrow, Die” strategy.
- Buy: Aquire appreciating stocks, real estate, or private equity and hold forever. Never sell. Always hold.
- Borrow: against the above stocks using securities-backed lines of credit at 1-3% interest, and because loans can’t be taxed they are avoiding potentially millions of dollars of taxes.
- Quick maths: let’s say I spend $10M a year and have $500M in stocks, I can simply borrow $10M at a 2% rate from the bank, which will cost me only $200k a year. A mere pittance. Now, if I sold $10M of stocks to pay for my yearly expenses, I get hit by 24% long term capital gains and 4% NIIT tax which hits me hard at close to $3M compared to $200k.
- Die: now those loans have to be paid back right? How are they paid back? Well, when the super-rich die the heirs/estate inherit the assets with a stepped-up cost basis (meaning it resets to its fair market value at time of death), which means if Grandpa bought $500M in Apple stock and it went to $2B when he died, his kids don’t pay capital gains on the $1.5B of growth. Then the loans from the “borrow” step above get paid off by the estate
The Bottom Line
Knowing this number is so important, if you haven’t sat down with a pen and paper and calculator and really figured it out, I can’t recommend anything more that could change your life.
It’s not about saying, “I’ll quit tomorrow.” It’s about knowing that if something happens, or you really want to change your job, and you have hit this number, you could, reasonably, quit and be “ok” for a good amount of time.
1. Seriously calculate how much money you spend every month
2. Multiple that by 12
3. Multiple that by 1.5 (Safety/variance calculation)
4. Write this number down
Having the ability to be truly free, FREE, is so amazing. You operate at such a better mental state when you are pursuing what you want to pursue on your own (not what someone else wants you to pursue).
Disclaimer: I’m not a financial advisor, none of this is investment advice, and the 4% rule has critics, read Big ERN’s Safe Withdrawal Rate Series if you want to go deeper. Also, please don’t try Buy Borrow Die unless you have $100M, in which case, you have people for this and you are not watching my YouTube channel.