There is a rule of 300, which can help you determine how much money you will need to become financially independent. Here I explain what the rule of 300 is and how you can work it out.

Inflation at historical 3%

Firstly, we need to factor in inflation into the equation.This is because your pot of money will need to keep pace with inflation, so that it is not eroded away.

The rate of inflation, or how much the price of goods increases, varies at any given time. Currently, at the time of writing, the rate of inflation in the UK is around 10%. Historically inflation averages out at 3% per year. That is, the cost of goods, will be on average 3% higher next year. This means that the value of the money you have will be worth 3% less next year.

Stock market at historical 7%

Next, we can factor in the rate of increase in your investment portfolio. It’s not in the scope of this post to discuss what vehicles your money should be invested in, but let’s say that you have a pension invested in the stock market, across all sectors.

Historically the stock market in the UK, has risen by 7% per annum. Some years the market will decrease and some years it will increase, but averaged out there is a 7% gain per year.

Difference is 4%

So, if the stock markets rise on average 7% per year and inflation erodes your money at 3% per year, over the long term your net gain in real terms will be 4% per year. 4% is therefore what you can live on without diminishing your Net Worth in real terms.

Your net worth, therefore, divided by 25 is what you can live on a year. (100/4=25).

Divide this number by 12 to get your monthly allocation. Therefore, you can live off your net worth divided by 25 x 12 = 300. This is what you can live on per month.

If you follow this formula, you will have a 95 % probability of your net worth outliving you.

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