What’s the Price of Financial Independence?

Have you ever thought about how much money you would need to be ‘financially free’?

It’s a question that has crossed the minds of many Australians…but does anyone really know?

Apparently they do.

For the past three years NAB have been conducting an annual survey of roughly 2000 Australians to see how much they believe they need to achieve financial independence.

In today’s Money Weekend we’ll take an in depth look into the findings and what they could mean for you.

But before we get to that figure, what does it really mean?

Freedom, in a financial sense, may mean different things to different people.

According to NAB’s chief economist, Alan Oster, it means:

‘…being able to pay off all their debts, for others, it could be no longer having to earn a salary, or it might just be not being stressed about money.’

It is also important to understand that this is different for every region. Which state you live in, the city you live in, or if you live rurally.

It also comes down to gender, age, your salary, and your relationship status.

Some want more, and some won’t need as much.

To break it down, if we look at the earnings of Australians, you can see that the more you earn, the more you want. Although, interestingly, the earners for $0–35,000 believe they need $43,000 more than those earning $50–75,000. And $87,000 more than those earning $35–50,000. As you can see below:

Australians Salary in ratio to ideal retirement savings. 07-04-2018 Source: NAB
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All of the numbers are up from 2017, except for those earning $0–35,000, and $50–75,000. Unsurprisingly, those earning the most also believe they need the most.

If we break it down by state, you can see that NSW requires the most amount of money, at $1,000,000. This could be attributed to the high cost of living and housing costs. On the other end, Tasmanians need the least, as you can see in the chart below:

Australian's salaries by state. 07-04-2018 Source: NAB
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As you can see, nearly every state’s costs are up from 2017. Except for Victoria. Victorians believe they need $76,000 less than last year.

Age and gender is perhaps the most interesting breakdown to consider. Males in the youngest group reported needing the most money. Males between the ages of 18 and 29 need $510,000 more than their female counterparts. If you look at the chart below, you can see that males believe they need more to secure a future, across every age group:

Australian's incomes by age & gender. 07-04-2018 Source: NAB
[Click to enlarge]

The higher monetary needs may be attributed to things like having higher mortgage debt levels compared to those in the higher age brackets, who may only have little or no mortgage debt left.

The most revealing factor is how Australians would use the $828,000. Most, 36%, said they would use it to pay off their debts. 32% said they would either save it or help out their family. 16% said they would use the money to purchase a new home. And 6% would help their children get a better education. Only 4% said they would put the money towards their retirement. And interestingly, only 1% said they would spend it frivolously.

In the table below you can see the breakdown of how Australians would choose to spend their money:

Breakdown of how Australians would choose to spend their money. 07-04-2018 Source: Domain
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In this case, being financially free doesn’t mean you’re ready for retirement. It means having the money to live the lifestyle you wish to lead without worrying too much about your finances.

So how can one become financially independent? There are many plans that could potentially make you financially free if you are self-disciplined.

Things like visualisation and planning can help you reach your goals. Budgeting is also a great way to monitor your spending.

It may seem simple, but don’t spend more than you make. Maybe even create an emergency fund. Eliminate debt. That may sound difficult. But when considering debt, don’t think about housing debts, look towards personal debts you need to eliminate.

Your career may also play a part in your financial freedom. Ensuring you have a steady income week by week can go a long way.

And with high volatility in the markets at the moment, if you want to stay on track to reach the goal figure of $828,000 to be financially free, then you may want to check out Vern Gowdie’s The Gowdie Letter. Here, you’ll find everything you need to know about protecting your wealth and how to increase it when the markets crash.

This week in Money Morning

As Monday was the Easter Monday public holiday, there was no Money Morning. On Tuesday, Harje uses the seven deadly sins as a guide for investing. But that’s not all. He also uses Warren Buffett as a director to prove that investing isn’t necessarily about being smart. No, having a good temperament as an investor can sometimes outweigh superior intelligence. And even if temperamental investing makes you look dumb for a while, as Harje explains, it may just pay off in the long run. To find out why, go here.

In Wednesday’s Money Morning, Harje looks towards the future of technology. Specifically, the 5G network. While explaining the history of 2–4G, Harje looks at each generation and how they impacted the mobile data network. This leads into the future of 5G technology. But who will get there first, China or the US? And is US President Donald Trump frightened at the prospect of China’s tech developments? Find it all out in Wednesday’s article, here.

On Thursday, Harje looked towards the markets. In a time of high volatility, both bearish and bullish experts are fighting for their sides. But who’s right? Well, at the moment nobody really knows. For the past nine years the markets have been bullish. Is it time for the markets to turn bearish? Go here to discover Harje’s speculation, and why he believes that not every drop or increase in the markets actually means something.

In Friday’s Money Morning, Harje returns to the scandal that landed Facebook in hot water. And while Facebook and Cambridge Analytica have both faced backlash over the data leak scandal, as Harje explains, governments aren’t without fault when considering their citizens private data. To find out about what Facebook cares about most, click here.

Kind Regards,

Alana Sumic,
Editor, Money Weekend

Alana Sumic is part of the editorial team here at Money Morning. She contributes to bringing you Money Morning each day, along with all of Fat Tail Investment Research’s many other publications.

As the Editor of the weekend edition of Money Morning Alana brings you a summary of the news for the week, and her own take on the week’s most important story in markets. She is also a writer and editor for Fat Tail Investment Research’s political publication, The Australian Tribune.

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