How to Calculate Your Freedom Number by Learning Your “Real” Net Worth

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What’s your number? No. I do not want your phone number. I’m talking about your freedom number.

Freedom number—what is that, you ask? If you don’t know, you’ve been thinking about your finances all wrong. Let me explain.

Your freedom number is the amount of passive income you need to fully satisfy your living expenses. Once you achieve this amount of passive income, you no longer need a full-time job. You will be living off of your passive investments and will be able to fully enjoy the life given to you.

So, what is that number for you? If you don’t know, don’t worry. Just keep reading.

This article is going to explain how to calculate and measure your freedom number—because, as we all know, you can’t manage what you can’t measure. 

Calculating YOUR Freedom Number

Calculating your freedom number is easy. It is the average amount you spend on a monthly basis. If you are organized, this will take as little as 10 minutes. If not, you may need to spend a couple of hours pulling together records of your various spending outlets. Either way, the time invested here is well worth it. Here are the steps to calculate:

  1. Figure out how much you spend on a monthly basis. Look back at all of your spending mediums for the last 12 months—including bank statements, credit card statements, debt payments, charity donations, etc.—and try to remember any cash transactions as well. Note: This is why I try to never use cash. It is untraceable!
  2. Put them all into a single spreadsheet. Aggregate all of the transactions you have made in the last 12 months into a single Excel spreadsheet.
  3. Divide by 12. Take the sum of all of the transactions you have made in the past 12 months and divide it by 12. Assuming no drastic life changes, this is your average monthly spending, otherwise known as your freedom number. Once your passive income surpasses this amount, you are free!

Let me give you an example. Let’s assume John Smith looks back at all of his transactions over the past year and determines that he spends approximately $5,000 each month. Once his passive investments generate $5,000 per month, he is “free.”


Related: How to Achieve Financial Freedom By Calculating Your “Rat Race Number”

Why did I put “free” in quotations marks? Because being free does NOT mean you should quit your job and move to a tropical island with bottomless piña coladas—well, at least not yet!

Being “free” means you can live your current lifestyle, exactly how it is, without working. Before elevating your lifestyle, you need to increase your passive income by the amount you desire. If you want to live a lavish lifestyle spending $10,000 a month without working, then you will need to increase your passive income to that amount prior to living that life.

Keeping your full-time job will likely help you attain this goal quicker by providing a steady paycheck that can be used to invest while also making it easier to obtain a loan.

Annual Income is Irrelevant

Most Americans use “annual income” as a barometer of how successful someone is. Let me break the news to you: Annual income by itself is irrelevant.

Why? Because annual income is solely an indicator of how much your time is worth. If you are financially free, you do not need to work, and your time is therefore worth an infinite amount.

The only thing that annual income is good for is giving you additional cash on a regular basis that can be used to invest and increase your passive investments.

While passive income is the underlying metric to determine freedom, it is driven directly by one’s net worth—though net worth is a misnomer. Real net worth is the true metric that should be monitored when considering financial freedom.

Net Worth vs. Real Net Worth

Your net worth is the amount you own (assets) minus the amount you owe (debt and other liabilities). Why is this so important?  Because you have the ability to earn passive income on your assets while still having to pay your debts.

As Scott Trench pointed out in his book Set for Life, many Americans’ net worth is tied up in their personal residence, personal vehicle, retirement accounts, etc. These are called “false assets.”

They do not provide you a return that can be deployed in a reasonable amount of time to generate passive income. Since our goal is to have cash-flowing assets and the ability to access this capital well before the age of 60, we will be excluding all “false assets” from our calculation.

And yes, we will be retaining the debt. You are still obligated to pay your debts even if you did not buy real assets for it.

This will give you your “real net worth” number.

Here is an example of John Smith’s “net worth” versus a “real net worth” calculation.

As you can see, John Smith received a metaphorical slap in the face after calculating his real net worth. The majority of his assets are “false assets.” His 401k and Roth IRA cannot be accessed without penalty until he is 60+.

He pays insurance, maintenance, and repairs on his personal residence and vehicle while both generate $0 of income. For that reason, these are all removed as assets from his “real net worth” calculation.

Now that we know the importance of and how to calculate your real net worth. What do we need that number to be to be considered “free”?

4% Rule

A common rule of thumb is the 4% rule. This assumes that, on average, you are able to make a 4% annual return on your investments. Now, of course, some years will be lower, and others will be higher. But the average rate of return is a conservative 4%.

Related: Are Your Children Stopping You From Achieving Financial Freedom?

Let’s revert back to the John Smith example above. If we take his monthly expenses that we calculated above and multiply it by 12, we will get his annual spending of $60,000. To get to that real net worth number, he divides his annual spend of $60,000 by 4% (or multiply by 25) to discover that with $1.5 million of real net worth, he will be financially free.

Now, if you are generating more than a 4% return or spend less than $60,000 per year, you may be financially free even before you hit this target. The 4% is just a rule of thumb that takes into consideration fluctuations in the market on a year-over-year basis.



I can hear everyone now: “One-point-five million dollars?! I’ll never get there.”

You’re right—with that attitude, you won’t. You need to shift your thinking. Rather than saying, “I’ll never get there,” you need to say, “How can I get there?” This allows you to think of a means to get there.

As Set for Life points out, you can do this by making more, spending less, and investing the difference wisely. I know I’m touting this book a lot, and I promise, I’m not paid to do so. It’s just a great book. If you haven’t already, the first step would be to read this book!

See you on the beach!

Where are you on your journey to reach your freedom number?

Leave your questions and comments below!

About Author

Craig Curelop

Craig Curelop, aka thefiguy is an aggressive pursuer of financial independence. Starting with a net worth of negative $30K in 2016, he has aggressively saved and invested to become financially independent in 2019. From sleeping on the couch and renting out his car, he was able to invest in two house hacks in Denver and a BRRRR in Jacksonville. He plans to continue to investing in both Denver and Jacksonville for the years to come. Craig's story has caught the attention of several media outlets, including the Denver Post, BBC, and many other real estate/personal finance podcasts. He hopes to inspire the masses to grab hold of their finances and achieve financial independence. Follow his story on Instagram @thefiguy!


  1. Erik Whiting

    Nice piece overall. I like the concept of Real Net Worth.

    A suggestion: if I we are going to include the DEBT on a house, then we should also to use the ASSET value of the house. Even though you cannot quickly access that equity to generate passive income, the point of net worth should reflect that if Mr. Smith did a fire sale on his house by pricing it at what he owed $200K…then that debt would disappear immediately….probably in less than 30 days. So by this calculation his Real Net Worth would be only negative $18K and change. Still pretty depressing and should be enough of a motivation to get started…but not quite as dismal as being almost 1/4 million in the hole.

    Numbers are fun to play with. Others might play a little differently. Again, I like the concept though of only looking at mostly liquid assets. I too don’t consider IRAs/401Ks as anything other than icing on the cake…my goal is to be retired by age 50…14 .5 years before I can touch it without penalty (although I can withdraw my Roth contributions tax/penalty free). Gotta think differently to get those kinds of results so much sooner.

    • Craig Curelop

      Hi Erik,

      Thanks for reading! You know, everyone has their opinion on what should and should not be classified as a “real asset.” My way of looking at it is that if the asset does not provide you with a stream of passive income, it’s not a “real asset.”

      Sure – he might be able to sell that house at a fire sale price. But what if there are no buyers? What if the market is like it was in 2008-2009? I believe it is best to look at the most conservative scenario. If you’re okay in the worst case scenario (i.e. you can’t sell the house), you will in no doubt be better off if you can sell it.

    • Craig Curelop

      Hi Edward,

      Thanks for reading, I’m glad you liked it!

      There are many ways that people interpret the 4% rule. I am suggesting that a conservative annual return on your deployed assets is 4%. Therefore, you just need to take your desired annual income and divide by .04 (or multiply by 25) to get the amount of assets you need.

      One of the rules of investing that I like to adhere to is to never touch the principal. So principal draw down would not be considered here. Once you start cutting into your principal, you are worse off than you are when you started investing. It’s a slippery slope.

      • The drawdown is not instead of ROI. The drawdown is conventionally thought of as in addition to ROI. However, if a person takes advantage of his freedom well before retirement age, draw-down is a bad idea because (using the 4%), the principal will be long gone while you still need it.

        The problem with the so-called freedom number is that expenses are not static. Inflation is real. If you never add to the principal, it won’t be long until the 4% fails to cover expenses. Your principal probably needs to be about double than what is posited here so the principal can continue building by retaining the excess ROI.

  2. Nicollette Roth

    I agree with Erik above. I like shedding light on the Real net worth and making sure that a person is looking at actual assets.

    However, John has equity in his primary residence, which is an asset, even if not immediately liquid. In his Roth IRA, he can draw his contributions at any time without penalty. The only part of the Roth IRA that he can’t touch until he’s 62 or whatever is the growth on his contributions. So, a portion of that Roth is immediately accessible. Same thing with the 401k. There’s ways to access the money to build net worth without penalty. Just have to play the right cards.

    • Craig Curelop

      Hi Nicollette,

      There are really a few different ways to look at it. The way I look at assets as to whether they are “real” or not is if they provide the owner of that asset with a passive income stream. That’s the goal we are seeking here, monthly passive income in excess of monthly expenses.

      Theoretically, John may be able to sell his house, though given the conditions of the market at the time of his sale, we don’t know for sure. The housing market could crash and he could end up under water on his loan.

      I think one’s “real net worth” should be looked at in the most conservative way possible. That way, in a scenario where you know what hits the fan, there might be a bit of a buffer.

  3. Susan Maneck

    Wait a minute, Craig. The 4% rule is designed for retirement income which are generally invested in stocks and bonds, not passive income outside ones retirement. I certainly wouldn’t be investing in real estate with the intention of only generating 4% of my investments a year. Heck, I get 3% from my checking account with no risk! It seems me the income which ought to be counted is the actually net stream of income it produces, not some arbitrary percentage of assets. I started buying real estate so I could retire anytime after I reached that magic 59 1/2 mark which gives me access to all my retirement funds except those of my current job. I haven’t retired because of the uncertainty of ObamaCare. And no, I don’t have anywhere near 1.5 million. I have maybe half of that subtracting my liabilities from my assets. But because of the way those assets are allocated, I am confident I can retire securely as long as the health insurance situation doesn’t leave me high and dry. My real estate income outside my retirement accounts very nearly replaces my earned income, and if I include rental income from my solo401K it replaces it entirely.

    • Craig Curelop

      Hi Susan,

      Thanks for reading. You pose a great question. So the 4% in your retirement accounts essentially assumes a 4% return on your investments. In real estate that is an extremely conservative number, you can absolutely substitute any return you’d like. If you’ve been investing in real estate for 20+ years and have seen an average return of 8%, then use 8%.

      4% is a conservative number and takes into account uncertainties in the market, etc.

    • Craig Curelop

      Hi Kevin,

      Great question! You can go about doing this by either:

      1) Look over the past month to see how much your employer has given to your healthcare provider or
      2) Get a few quotes on external health insurance and other benefits from your W2 job to see what it would cost you if you were to quit.

  4. pravin shanker

    Great Article Craig,

    But one thought, based on my skills & potential I have financial leverage. A bank will give me certain amount as loan due to that. So shouldn’t a factor if it should be included in my real net worth somehow ?


    • Craig Curelop

      Thanks Pravin!

      How can you quantify your skills & potential to put into a net worth calculation? That may fluctuate significantly. If you’re talking about a degree or certifications you have, that does not contribute to your net worth. Those just allow you to make more annual income which you can then save/invest which will build your net worth. Hope that makes sense!

  5. Jon Tudor

    As a few others have mentioned, I would consider parts of the retirement savings valuable net worth assets and would include the assets of a primary residence to at least balance out the debt of the primary residence even. In particular, the Roth contributions and 401K pre-tax dollars should be included due to the penalty free methods of withdrawing them before standard retirement age.

    Ultimately though, net worth matters less than cash flow for early retirement. If passive income is greater than expenses on your personal income statement you are in the right position and assets really become a cushion for periods where expenses exceed passive income.

    • Craig Curelop

      Hi Jon! Thanks for the comment.

      There are certainly different ways people view things. The way a real asset can be thought of is similar to how Kiyosaki describes an “asset” in Rich Dad, Poor Dad. If it puts money in your pocket, it’s an asset. If it takes money out of your pocket, it is a liability.

      Your personal residence does not put money into your pocket. Sure… over time, there is a very high probability that it appreciates, but you are not benefiting from that cash flow on a monthly basis.

      I am almost positive you cannot withdraw any part of your 401k before retirement without paying the penalty and being taxed.

      You’re absolutely right… passive income is the name of the game. The means of how you seek it is up to you, but the ultimate goal is to have passive income that exceeds your expenses.

  6. James Wilson

    I like the idea of usable net worth that I learned through articles like this. It made me realize that I shouldn’t be putting more money in a non-matching retirement account, but instead use that money to build usable net worth since my goals are to retire early. Thanks!

    • Craig Curelop

      Hi Karen,

      Thanks for reading. I’m glad you liked it! I am house hacking right now as well and I do consider that as part of an asset because it puts money into my pocket every single month.

      Hope that helps!

  7. Branton B.


    Great article. Quick question: for the REAL net worth balance sheet, how do you prefer to calculate in rental properties? Much like others have mentioned, including you, I hate using “current market value” of a property in an asset column (whether personal residence or investment property), because its liquidity (and value) is solely dependent on an opinion that can change daily/monthly. So that would rule out adding the current market value in the asset column and the associated mortgage to the liability column. Would you recommend another way that is more reliable?

    • Craig Curelop

      Hey Branton,

      Thank you! So I just take the Zestimate because it integrates nicely with Mint. In my head, I know that to be safe, I should discount it by 10%-20% to get an accurate value of what I could actually sell it for.

      Hope that makes sense!

  8. Brandon Kanakis

    The statement that you cannot access your retirement accounts prior to 59 1/2, is a misnomer. If you have a 401k you can always roll it to a traditional IRA. As you are nearing the financially free portion of your life you can always do a backdoor roth conversion from a traditional IRA. If you do this over 5 years you reduce some of your tax burden and keep more of the investments out of the hands of the IRS. Once you are in a roth IRA you can withdraw those funds tax free year after year for anything and at any time. While I believe they do not generate a stream of revenue equivalent to real estate, I do not believe they should be thrown out of real net worth. If you have to sell assets that appreciated at 8% a year but provided no dividends, that is no different than getting 8% dividend with 0 appreciation. That being said, real estate CAN provide nicer passive income streams than investment accounts. But again it depends on how well you bought the homes, are they paid off yet as you are hitting the free category, how well have you been able to keep them occupied. How much are your tenants abusing them etc.

    • Craig Curelop

      Hi Brandon,

      Thanks for reading and you bring up a valid point. My argument here is that, sure, you can do all of these creative things to access your IRA prior to that retirement age. However, what percentage of Americans do you think actually know that? How many are trying to figure it out? How many anticipate on accessing this capital before they are 59.5?

      I would argue that a small minority are savvy (and want to be savvy) enough to figure this out. Most people are just playing the waiting game.

      If your goal is to build up your Roth IRA to then take it out and invest it elsewhere, then maybe you do count it. I just don’t think that is most people’s strategy.

  9. Jason Hinton

    I find it funny that you believe that retirement accounts don’t contribute to net worth. Your premise is wrong. People can access retirement account penalty free before 59 1/2

    1. You can take principal put into a Roth IRA out penalty free anytime
    2. You can take earnings out of a Roth IRA penalty free but not tax free if the account has been open less than 5 years and you become disabled or to pay for education or medical expenses.
    3. You can take principal and earning out of a Roth IRA penalty AND tax free after the account has been open 5 years if you become disabled or to pay for education or medical expenses.
    4. You can access money in a 401K penalty free at 55 if you retire at the age of 55 or later.
    5. You can take Substantially Equal Periodic Payments out of a traditional IRA penalty free at any age as long as you continue until the ago of 59 1/2 or 5 years (whichever is later)

    These are just the exception I know off the top of my head, no doubt a good tax accountant know more ways.

    • Craig Curelop

      Hi Jason,

      Thanks for the comment! And you’re right. There are absolutely creative ways to access this capital. This goes to my point above where I responded to Brandon’s comment.

      I would argue that most Americans have no intention in touching these accounts until they reach the appropriate age. They do not know the creative ways to access this capital and deploy it wisely. They just mindlessly contribute and contribute for 40+ years and when they hit 59.5 they take it out.

      If contributing to these funds is part of your investing strategy and you plan to withdraw and invest wisely. Maybe you do account for it as part of your real net worth? Most people are not planning to do that though. Therefore, it should not be counted.

        • Craig Curelop

          My point is that unless your intentions are to access that money before you retire, then in no way is it helping towards the goal of early financial freedom. It is simply acting as a buffer so that when you retire, great you’ll have some extra capital. Therefore it should not be included as part of your net worth right now.

          Most Americans do not have the intention of withdrawing from their retirement accounts early so I am suggesting that this does not count.

          At the end of the day, your “net worth” is just a number. If you can’t generate passive income from it, what does it matter? Passive income is what us early financial freedom seekers are trying to achieve.

          If counting your retirement accounts as part of your net worth helps you sleep at night. Do it. But you’ll net worth number will have to be larger in order to attain financial freedom.

        • Jason Hinton


          I plan to access money in my IRA when I retire which will be well before 60. What you don’t seem to get is that people can access money in IRAs without penalty before the age of 59 1/2.

          Most Americans have no hope of retiring before they can claim Social Security. Most Americans will never invest in real estate. What most people do has no bearing on what a wise investor should do.

          I have no trouble sleeping at night. I am troubled that someone on a site dedicated to financial matters is giving out incorrect information and refuses issue corrections when multiple people point out that they are wrong. In your article you state: “His 401k and Roth IRA cannot be accessed without penalty until he is 60+.” That statement is FALSE and should be corrected.

  10. Branton B.

    I agree it comes down to perspective. In general, the basic understanding is that most retirement accounts are most advantageous if untouched until retirement. There are, of course, ways around this with careful planning (as you mentioned above).

    Another option, though it may only impact a small demographic, is for Federal and some State employees. If contributing to a federal Thrift Savings Plan (TSP), which is essentially a 401k, the employee can take out loans against it to use for investment purposes. The best part is that the interest (normally between 2 and 3 percent), is paid to yourself during the repayment period.

    Just another tool in the tool box.

    • Jason Hinton

      Non-government employees can also take loans out against their 401K. The risk is that if you are fired or quit your job before the loan balance is paid back you only have 60 days to pay the balance in full. If the loan is not repaid in time the balance is treated as a withdrawal and subject to income taxes plus a 10% penalty.

      I agree that retirement accounts are best used for retirement. However, one does not have to wait until 59 1/2 to retire and tap them. So you can still retire at 45 and hit the beach if your money is in a retirement account.

      (IRA’s are also a popular for college savings.)

      • Craig Curelop

        Yes, it does come down to perspective and how you are planning to use the money in that account.

        I would argue that most Americans have no idea they can tactfully use their retirement accounts to invest in something wisely now with greater returns. The ones that know they can, probably won’t because going about it can be confusing.

        So for that reason, I do not believe it should be included in “real net worth.” Only if it is part of your investment strategy.

        I do think you should be tracking both your net worth and your real net worth so the retirement accounts are not lost.

        • Jason Hinton

          There is no reason to take money out of retirement accounts to invest it. It is already invested in that account. IRAs have a huge variety of investments to choose from.

          Investing in stocks and bonds IS part of my investment strategy. IRAs and 401ks are an excellent place to do that type of investment.

          Your “real” net worth calculation only makes sense if looked at with blinders that only see investing in real estate as “real” investing. I know this site is focused an real estate but there are many other good ways to invest.

  11. Jeshua Patrick

    Craig, I also feel the real net worth calculations are flawed. I understand that equity in a home is not cash flow and I also understand that people often have trouble being honest about or are completely ignorant of their home’s actual current market value (I.e. What I could sell it for within 30 days) so I’m all for leaving that out. What I don’t understand is why you would completely ignore retirement assets. I get that not all of those are current assets and as such cannot be counted in full; however, is it really a bad idea to count its current cash out value? For example, my 401k has a current total value of $67k but a cash out value after taxes and penalty of $40k so why not count the $40k in with my real net worth?

    • Craig Curelop

      Hi Jeshua,

      Your bring up a valid point and this is actually how I thought about it for awhile. If your intentions are to withdraw your 401k and invest it, then maybe the $40k does count in your real net worth. However, I would argue that most people are not planning to liquidate their retirement accounts to invest. So in most people’s scenarios, this should not count towards your real net worth.

      Hope this makes sense.

        • Craig Curelop

          The name of the game is passive income that is liquid. Otherwise it does not help you achieve the goal of early financial freedom. $7k in your IRA last week does nothing for you if you don’t access it until your 60.

          For example – I have $5k per month in expenses. I can generate $10k a month in passive income in my retirement accounts and I will still have to go to work tomorrow.

          However, if I have $10k in passive income from real estate or another liquid passive income source, I am financially free and can retire tomorrow.

        • Jason Hinton


          “For example – I have $5k per month in expenses. I can generate $10k a month in passive income in my retirement accounts and I will still have to go to work tomorrow.”

          Why wouldn’t this person tap that retirement account to retire early? You absolutely can access retirement accounts penalty free before the age of 59 1/2.

    • Jason Hinton

      Why the concern about selling a house in 30 days? Are we planning to liquidate assets to pay a ransom? Why the deadline? I can’t think of a scenario in which I would have to liquidate my house in 30 days. Any short term cash requirement should be covered by one’s emergency fund.

      Back in 2008 I was laid off when the company I worked for went bankrupt. No stress, we lived off our emergency funds while I look for a job and enjoyed some time off. I got quite a few projects done around the house in the 7 months I was unemployed. Unemployment insurance was a joke, I could have never relied on it to live, but it was useful to continue investing in an IRA. (Early 2009 was a GREAT time to invest in the stock market!)

  12. Derin White


    Your misrepresentation of retirement accounts, and the ability to access them before retirement age is well documented by other commenters. I’ll add this: investing in stocks is the most passive way someone can invest, as income generated by stock appreciation and dividends certainly add real dollars to your account with zero involvement (unlike RE investing) on your part. Seeing as how tax advantaged retirement accounts are the most efficient vehicle for stock investing, not including them in net worth calculations is pretty silly.

    Your understanding of the 4% rule is completely wrong. This rule is based on historical stock market returns, and predicts a safe withdrawal rate based on the probability that your account will not run out of money for a given period of time. 4% is not the expected rate of return as you stated. If 4% is simply the conservative rate of return that you use in your personal planning, that’s fine, but don’t call it the “4% rule” and explain it as something it’s not.

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