How Much Money Do You Actually Need to Be Free?

It's easy to get lost in the noise and focus on the wrong things when you are trying to build wealth, achieve financial freedom, and maybe even retire. So in this video, I'm going to share with you seven rules of finance that focusing on will make it much easier to build wealth faster. Number one is the rule of 250. The rule of 250 is an inversion of the 5% rule. I'll show you what that means in just a moment. But the rule of 250 states that whatever your monthly expenses are, all you have to do is multiply that by 250, and that will give you the number that you need to achieve financial freedom. Let's say your monthly expenses are $4,000 per month. You multiply 4,000 by 250, and that gives you a grand total of $1 million. The reason the rule of 250 works is because it's an inversion of an easy way to get to the 5% rule. That means you can take 5% from this lump sum every single year, you will never run out, and at the current amount, that will replace your current monthly income. Because if you start off with $1 million and you take 5% of that, That gives you $50,000, 50,000 divided by 12 is $4,166. So again, if your monthly expenses are $4,000, multiply that by 250 and that gets you roughly to the 5% rule. You can take 5% out of your account forever. It'll never run out. And assuming it's invested correctly, it will actually continue to grow. You're not taking all the growth. You're just taking from the growth. If your monthly expenses are $10,000 per month, you multiply that by 250. And that means you need two and a half million dollars in order to achieve financial independence. So you can use this rule one of two ways. The first way you can use this is to get to the bare minimum. Let's say you just wanna know what's the absolute minimum that I need in order to feel safe and feel secure. I'm not actually gonna retire, but what is the minimum? First of all, you would strip out any expenses that you don't actually need. You'd strip out your Netflix, you'd get rid of all of your DoorDash and your eating out. You just look at what are my basic absolutely necessary expenses. And let's say you are able to live very frugally and you're able to get that down to $3,000 a month. Multiply that by 250, you only need $750,000 to achieve financial freedom. Now, again, this is the minimum. This is the first way we're using this. So you're not actually going to retire and just live like a miser off of $3,000 a month. But this gives you the ability to say, hey, if I get sick and I can't work, I'm fine. This gives you the ability to say if my boss starts acting like a jerk or my company changes directions and I don't like my job anymore, I could quit and start my own business. We could live off of just the growth from the investments and we'd be completely fine. I could have an infinite runway to get my business started. This gives you just a safety net. So you can use the rule of 250 to know where your absolute safety net is. The other way to do this is as an aspirational goal. Let's say you actually want to know where you have to get to live the way you want. And let's say you want to spend $50,000 per month, multiply that by 250 and you need 12 and a half million dollars. If you have 12 and a half million dollars, multiply that by 5%. That spits off $625,000 per year for you. Divide that by 12 and that is just over $50,000 per month. So the rule of 250 is a good rule of thumb for you to use to be able to figure out what is the lump sum I need in order to be secure, independent, retire, wealthy. And the last note about the rule of 250 is it tells you how close you are because most of us are not starting from zero. You've got some money in your 401k, you've got some money in your brokerage account, you've got some money in gold, you've got some money in Bitcoin. Add it all up. Let's say you are already at a million dollars. You only need to get to two and a half million dollars. You know you're almost halfway there. But if you are starting from zero, that's where rule number two comes in. And I call it the 60-10 rule, which states that if you can save 60% of of your income, you can retire in 10 years. If you know three numbers, then you know exactly how long it'll take you to be able to retire. Number one, you need to know how much you are saving per year from your income. Number two, you need to know your growth rate. Number three, you need to know your withdrawal rate once you start withdrawing. This table shows you exactly what those numbers are. So this first column is your savings rate. So if you are saving 5% of your income, it means you are spending 95% of your income. If you are saving 40% of your income, you're spending 60% of it. If you are saving 100% of your income, you are spending 0% of it. This next column shows you how many years you are away from financial independence, assuming a 10% growth rate and also a 5% withdrawal rate once you start to withdraw. If you go all the way down to the extreme and you are able to save 100% of your income and spend absolutely 0%, then the amount of time it takes you to get to financial independence is If you don't have to spend any money, you're already there. You don't actually need to earn any more money. But starting up at the top, if you are only able to save 5% of your income, then it's going to take you approximately 40 years to get to financial independence. Now, this last column shows you a more conservative option. If you say that your growth rate's only 8% and your withdrawal rate's only going to be 4%, it's going to take you longer to get there, but it's going to be more conservative. Now, I call this the 60-10 rule because financial independence, financial freedom, retirement, whatever you want to call it, seems like something is too far away for most people to consider. And anything longer than 10 years just for most people seems so far away in the future that it just seems unreal. But if you can put a 10 year or less time frame on something, it actually seems achievable. It seems like this is something I can actually do. Touch, feel, taste, imagine it's almost here and I can work towards this. Whether you are assuming a 10% growth rate, an 8% growth rate, then saving about 60% of your income is Hey, real quick, if you are an active investor and your portfolio is not growing as fast as you'd like, then I would like to give you a free gift. This is something I've been working on for a long time. My team and I put together a portfolio stress test. We looked at the top six risks that people are exposed to in their portfolios many times without even knowing it. And most importantly, What you can do to fix it. So we built this really cool questionnaire quiz on my website where you can input all the information about your portfolio, your investing goals, and then it's going to spit out for you a customized blueprint that shows you where you're currently at and what you need to do to get to the next level. So no matter what is holding your portfolio back and no matter what risks you're exposed to, maybe without even knowing, I wanna help you find and fix your vulnerabilities, again, completely free. Once you go through this little one-minute questionnaire on my website, it's going to send you a customized blueprint to your email, PDF you can download and you can keep it forever. And that's going to give you access to all of my courses. I've created literally hundreds of hours worth of educational content that I used to sell for hundreds, sometimes even thousands of dollars. This is now my free gift to you. You can access it 100% completely free of charge. It's going to give you all the education, all the strategies and tactics that you need in order to fix your portfolio. All you need to do is go through the questionnaire, open up the email, save that PDF, and get to work. So if you'd like to take advantage of this, all you have to do is go to my website, heresy.financial/stresstest. The link is in the description below as well. It's heresy.financial/stresstest. Plug in your portfolio information, and I'll send you your custom blueprint 100% free. Now, two things I need to note about this rule. Number one, this assumes that your expenses are not going to change from here to there. This is strictly a math calculation on when you will get to the point where your portfolio will be able to produce the amount of income that you currently spend. So if you want to get to the point where your portfolio can produce a larger amount than your current expenses, then obviously you're going to need to save for longer. But if you just want to get to the point where you can quit your job or do something else, then this table is going to give you a rough approximation of when you can do that. The second note I need to make about this is that despite the fact that we're talking Talking about financial freedom, financial independence, retirement. I personally do not actually believe in retirement, and I hope that you don't feel me advocating for this at all. I think financial freedom and retirement are two entirely separate things. Retirement is saying, I'm no longer going to work, but. I personally believe that men were built to work, that we are created to work. Working is providing, it is giving, it is making something useful for the world. And I think that if you are still capable of providing, if you are still capable of creating, if you are still capable of building and you decide to quit and you decide to take it easy for the next 10, 20, 30, 40 years. Just because you have a certain amount saved up in your brokerage account, I think you will probably turn into somebody and something that you do not recognize and you do not like. And so for me, financial independence is having the freedom to do the work that I feel is meaningful. Financial freedom is having the ability to say, here is what I'm going to produce. Here's what I'm going to create. Here's what I'm going to work on. Here's the responsibility that I'm voluntarily taking onto my shoulders. And I don't have to say yes. to the boss that I don't like. I don't have to do the thing for the company that I don't want to. I can live a more meaningful life. I can create more value for people in society, taking on the burdens that I choose to take on rather than the ones that I'm forced to take on just because I need the paycheck. I think freedom and responsibility are integrated to basically be the same thing. And if you try and get rid of all responsibility, you will also get rid of any freedom that you thought you got by just saving up to a certain amount in your brokerage account. All right, the next rule is the 15% rule, especially in this day and age, everybody's always worried about a market crash. We want to invest and get the big returns, and we are scared to see that number go down. We are scared to see the red appear on our screen. However, going back to 1950, the average drawdown in any given year is almost 14%. Every single year, the stock market goes down at some point during the year, and the average is 14%. That is not the extreme. The extreme is going to be numbers like 27%, 33%, 37%. 34%, 48%. The average though is 14%. And so if you're sitting here looking at the stock market and getting scared because of a 5% drop or you're getting shaken out because of a 10% drop, you're ignoring history. Volatility is one of the prices to play the game. It's the cost of entry. You don't get the ups without the downs. And so anything less than a 15% drop is a buy the dip opportunity. Don't be scared of those drawdowns. Those are a gift to buy assets at lower prices. They should be expected, not feared. Rule number four is the rule of income plus 10%. Everybody wants to be a trader. Everybody wants to be an active investor. But there comes a time when it becomes worth it. Before that, it's not worth it. Imagine you have $1,000 to your name and you make $70,000 per year. You could spend all of your extra time. All of your waking hours, learning, researching, trading, worrying, trying to actively trade and actively invest that $1,000 to try and turn it into $2,000. And if you were able to do so, that would be a 100% return. The best hedge fund in history is able to do about 40% every single year. And so if you are able to far outperform the best hedge fund in history, then you could turn your $1,000 into $2,000 over the course of a year. If you decided to just save 10% of your income, then you could turn that $1,000 into $7,000 and have a 600% return. And that's not even investing it. That's just having it in a savings account with zero return. And so when you have very, very little money, the most important thing that you can do to grow your wealth is to earn more money and then take that money and save it and invest it. And when I say invest it, I mean literally just throw it in an index fund. Don't ever look at it. Don't actively trade it. Throw it in index funds. Don't think about it. However, let's say you are at the end of your career. You're making $150,000 a year, and you've got $1.5 million saved up throughout all of your investment accounts. Even if you were able to save 100% of your income, which you can't because there's taxes that are gonna be taken out. You've got basic living expenses. But let's just say you were able to save 100% of it. You put that $150,000 into your $1.5 million. You've increased your net worth by 10%. But guess what? That's what the market on average is going to do for you. So if you're able to actively invest and even increase your returns from 10% to 12% or 14% because you made a couple really good trades, then that extra boost is going to far outperform whatever your income could do. And so the rule is take your income and add 10% to that because 10% is just what the market can do on average. If you can increase your dollar amount net worth more by just investing more, Focus on just saving and investing more. But once the difference is more than 10%, it does make sense to then start focusing on actively trading and actively investing. So in the beginning, focus all of your efforts on increasing your income, keeping your expenses the same, and dumping every extra dollar into your investments. Then usually it's probably around $100,000 for most people is when that flips, and then it does make sense to try and start actively investing at least some of it. Rule number five is the 20-year rule. And the 20-year rule states that the market has never been negative over 20 years if you reinvest dividends. During the Great Depression, the stock market peaked in September of 1929, and it did not breach that all-time high again until September of 1954. So that was about 25 years later when it finally broke back above its all-time high, which was a 25-year period of time where the stock market return was negative. But if you reinvest the dividends, it brings that down down to just under 20 years and the Following the Great Depression, that was the longest period of time that the stock market ever went without hitting a new all-time high. The vast majority of the time, it was much less than that. This is a chart that shows you the 10-year performance of the stock market starting from every single year since 1920, and there are only about a dozen decades in which the 10-year performance is negative. I call these lost decades, where you invest accidentally all All of your money at the very top and 10 years later. The price is still not back where it was when you first invested. That has only happened about a dozen times in stock market history. Every other year has resulted in a positive decade. Now, assuming you have an investment time horizon longer than 10 years, these are opportunities again. If you reinvest dividends and you continue to dollar cost average and buy more as the price is lower, your loss decade shrinks a lot because your cost basis goes down. The next rule is the negative 50% equals plus 100% rule. This is a rule that highlights the power of losses and how losses are exponentially more powerful than gains. Take, for example, the stock market during the period of time from 2000 through 2007. The stock market fell roughly 50% from peak to trough during the dot-com bubble burst. However, to get back up to its all-time high, it had to rise roughly 100%. And in fact, after falling 50%, once it had gone back up 50%, it was still only halfway back up to where it was before. Think of it this way. If you start off with $30 and you have a 50% loss, now you have $15. In order to go from $15 back to $30, you don't need another 50% increase because 50% of 15 is not going to get you 30. You need a 100% increase from 15 so that you can add 15 to 15 to get back to 30. This is true of smaller numbers as well. If you have a 10% drop, you don't need a 10% rise to get back up to even. You need 11% rise. If you have a 90% drop, you need a 900% rise just to get back up to break even. Losses are more powerful than gains, exponentially so. This is why risk management is the number one key. To every single one of the greatest investors and traders throughout history is their number one rule, never lose money. Because the greater the losses, exponentially more so do you need gains to just to get back to where you were before. So it's important to remember that down 50% is equal to up 100%. To give you the motivation you need to always worry about avoiding large losses. If you take care of your losses, your gains will take care of you. One more illustration to drive this point home. There are only four outcomes. Well, let's say five outcomes with investing. You can make a lot. You can make a little. You can break even. You can lose a little or you can lose a lot. If you invest completely randomly with completely random buys and completely random sales, you will have all five outcomes. You'll have some big gains, some small gains, some break evens, some small losses. And some large losses. If the only thing you do is get rid of the large losses, then your break-evens will cancel each other out because you didn't make anything, you didn't lose anything. Your small wins and your small losses will also cancel each other out. The only thing then driving your account will be the large gains. Take care of your losses and your gains will take care of you. So the question is, How to do that? And that brings us to the final rule, rule number seven, which is the 1% risk rule. And this is the rule to only ever risk 1% of your portfolio on any trade. Now, don't get me wrong here. I am not saying that every position has to be 1% of your account. I'm saying the amount that you are risking losing is 1%. Let's say, hypothetically, you put 100% of your portfolio in Apple stock and you invested at $300. This would mean that if Apple then falls. $3 from $300 down to $297, then you would need to sell because at that point you would have had lost 1% of your portfolio. Situation number two, let's say you invested half of your portfolio in Apple and you bought at $300. Well, now you could withstand a 2% loss in Apple and sell when it hits $294. And because you only invested half of your portfolio in Apple, A 2% loss of Apple would mean a 1% loss in your overall portfolio. Situation number three. Let's say you had invested 10% of your portfolio in Apple at $300 per share. Well, now you could allow Apple to fall 10% and you wouldn't have to sell unless it came all the way down and hit $270 per share because 10% of 10% is 1%. Now, let's say you had invested just 2% of your portfolio in Apple. At $300 per share, that means you could let Apple fall a whopping 50% and you wouldn't have to sell unless Apple hit $150 per share. Because if you only put 2% of your portfolio in, that position could fall by half and you would only lose 1% of your portfolio. The reason why the 1% rule is so powerful is because it allows you to manage risk in many different ways. You can do that through Through position sizing alone, you can do that through stops. You can do that through setting hedges, and it allows you many, many, many losses, which gives you many, many, many chances of many, many gains. You could have 10 losses in a row, and you still have 90% of your portfolio. Heck, you could have 15 losses in a row, and you'd still be sitting down 15%, which is just the average intra-year drawdown for the S&P 500, like we covered in rule number three. And so by limiting your loss on each position to 1% of your portfolio, it allows you to actually take on greater risk, maybe greater leverage, and more asymmetric trades that have even more of a capability to have explosion to the upside. You can expose yourself to greater upside risk if you limit yourself to smaller downside risk. These rules have served me well. They have served many investors and many traders very well over the years, and I hope they're helpful to you as well. One last note, if you're an active investor and your portfolio is not growing as fast as you'd like, my team and I put together a completely free gift for you. It's called the Portfolio Stress Test. All you have to do is answer some questions about your portfolio and your investing goals, and then it will email you a custom blueprint that will help you fix the vulnerabilities in your portfolio that you maybe didn't even know were there. It's also going to give you access to all of my courses, hundreds of hours of education, strategies, tactics on investing and trading that In order to fix your portfolio, again, this is all completely free stuff. I used to charge a lot of money for your gift free to access it. Just go to heresy dot financial slash stress test. The link is in the description below. Fill out the questionnaire, plug in your information. I'll send you that custom blueprint. You can get started. Thank you so much for watching. Have a great day.