Can the 'rule of 25' make sense for your financial freedom?

The journey to financial independence is becoming a shared ambition, and the 'rule of 25' often acts as the compass for this journey. This rule suggests that the key to financial freedom is having a nest egg 25 times your annual expenses.

Therefore, it's less about the amount you earn and more about how much you spend and save. The returns on your investment should be enough to maintain your preferred lifestyle without eating into your capital.

This principle splits our spending into two categories, needs and wants, with the latter further divided into loves and likes. It's not about cutting out all non-essential spending. Instead, it nudges us to focus our resources on what we genuinely need or love, and drop the rest.

By prioritising needs and loves over wants and likes, we often realise that some of our spending is more about impulse than genuine necessity.

Let's take budgeting as an example. When we are planning our expenses, our basic needs like housing, food, and healthcare are non-negotiable. But what about our love category?

That's where we make room for the things that truly matter to us, whether that's travelling the world, buying a dream house, or getting that family car. The trick here is to use the things we love to drive our financial decisions, not the fleeting desires that come and go.

On the journey to financial freedom, time, investment performance, and the savings rate are our three companions. Time is constant, and investment performance is tricky, dependent on your skills, risk tolerance, and the market's mood swings.

Even the great Warren Buffett's annual return averaged around 20 per cent, and a significant chunk of his wealth was built after his 65^th birthday.

The savings rate, on the other hand, is under our control. It's the difference between our income and expenditure, and here's where the magic happens. Saving not only grows our wealth but also builds financial discipline and creates the habit of multiplying our money through investments.

Plus, having a nest egg allows us the room to make mistakes. We can't predict the future, as we have seen with unexpected events like the pandemic or sudden market crashes. Having some savings tucked away helps us ride out these rough patches without derailing our journey to financial independence.

But here is the kicker, boosting savings does not always mean earning more. It could simply mean saving more. If we make a habit of saving before we start spending, we are setting ourselves up for financial health and independence. And isn't that what we are all aiming for?

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