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How to Calculate Your Financial Independence Number

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The Financial Independence Number is a great way to find out how much you need to be financially independent. It is simply the amount you need to earn just to cover all of your bills so that you don’t have to depend on family, government or even debt to live the rest of your life. Once you reach this number you don’t have to work anymore.

The Financial Independence Forumla

Achieving financial independence is a very ambitious goal, but it is not impossible or difficult. Just set the goal and strive to achieve. The financial independence formula provides a rough estimation of how far away you are from achieving financial independence right now.

It comes in two parts:

  1. Finding your Financial Independence Number
  2. Determining the number of years to independence

1.  Find Your Financial Independence Number

Firstly, we need to determine the total amount of money you require to provide you a sufficient income for life.

You can figure this our by using this formula:

Financial Independence = Yearly Spending ÷ Safe Withdrawal Rate

How Much Do You Spend?

To calculate your Financial Independence Number, you will need to determine your yearly spending. If you have a detailed monthly budget, simply take the monthly expense and multiply that number by 12 to get your yearly spending.

As an example, assume you spend roughly Ksh. 100,000 per month, which makes your yearly spending requirement Ksh. 1,200,000.

What is the Safe Withdrawal Rate?

The safe withdrawal rate is essentially the percentage of your net worth that you can withdraw each year without running out of money before you die. The rule of thumb is to withdraw no more than 4% per year. This ensures that you do not overdraw from your savings and eat into your capital. The safe withdrawal rate takes into consideration the rate of return on your savings and the annual inflation rate.

Learn More: How to Produce Income From Investing Forever

Calculating the FI Number

Calculating the FI number is fairly easy.

As an example, here is the financial independence number for Jane who earns Ksh. 150,000 per month and spends about Ksh. 100,000 of this amount.

Ksh. 30,000,000 = [Ksh. 100,000 x 12] ÷  4%

This means that Jane needs Ksh. 30M in savings to live out the rest of her life without running out of money.

2.  Determine Years to Financial Independence

Secondly, we need to know the number of years you require to achieve financial independence:

Years to FI = (FI Number  – Amount Already Saved) / Yearly Saving

So, let’s assume that we are just starting out in this saving thing, and we start saving Ksh. 50,000 of our monthly income. The number of years to achieve financial independence will be:

50 Years = [Ksh. 30,000,000 – 0]/Ksh. 600,000

Retirement in 50 years…that’s daunting, Right? Considering the economy we live in and the challenges we have as Kenyans i.e. getting a good paying job, job security, starting and running a successful business – you’ll need to seriously hustle or get a Ksh. 59M NYS boost.

Since the latter will land you in jail…Let’s break this down further and see if you can do this:

Saving For Financial Independence

Your Financial Independence Number is a great indication of how much you need and how long it will take you to reach financial independence with your present rate of spending and saving. However, this number isn’t set in stone. You don’t need to settle for that. You can always find ways to cut your annual spending and boost your savings – or better yet, do both – you can reach this number a lot faster.

This can be achieved in three ways:

  1. Paying off your debts. It will take time. Make that decision to reduce your debts and give yourself more freedom –  to save more and achieve your target sooner.
  2. Increasing your income. The more you earn in a month, the more you save, and the sooner you reach your financial independence number. You can always increase your income by getting a promotion or asking for a raise, getting a second job, selling the things you don’t need or setting up additional income streams.
  3. Cutting back on your spending. Reducing your spending is a great way to immediately increase the amount you can stash away in the short term. To save as much as possible, focus on the big expense items such as rent, food, transport, entertainment or interest payments.

Investing For Financial Independence

Along with increasing your savings rate, you can also achieve your financial independence number by earning a good return on your savings. Unfortunately, figuring this out can be very tricky and daunting to many.

However, here are the three fairly simple things you can do:

  1. Adopt a buy and hold strategy for your portfolio. Invest in assets with historically good returns for the long haul. This means that you will need to wait out the ups and downs of the market. Ensure that your portfolio is well diversified, has low fees and has a simple investment strategy – buy when low and hold out for the long haul.
  2. Invest automatically. Once your money hits the account every month, set up a standing order to make automatic deposits to your savings account or investment bank. With this, you’ll have no excuse not to save and set aside money for your financial independence goals.
  3. Rebalance your portfolios regularly. As an investor, you’ll need to understand what your risk appetite is. With this, your investment strategy and division of funds into the three asset classes will be maintained. For instance, an aggressive investor will choose to invest 60% in stocks, 15% in bonds and 25% in short-term investments. Rebalancing means that, should any of these investments grow faster than the other two, then the investor will shift funds to maintain these ratios. This rebalancing act ensures that you buy when low and sell when high to maintain your ideal equilibrium.

Tracking Your Financial Independence

Overall, break down your goal into smaller manageable goals and track your progress every year. From the example, we already know that Jane needs Ksh. 30M and it will take 50 years to achieve this. Every year she will need to save 600,000 or 50,000 per month. At the end of the year, Jane will need to check it her saving goal has been met. This way, she will be able to save the Ksh. 30M within the timeframe and have more than she needs by the time 50 years has lapsed.

Note: We are not taking into account the return on investment. If we did consider the return, then the years to financial independence will significantly decrease. However, if you choose to save for the entire period, there is nothing wrong with that.

The more you have, the better. As the ideal situation, you’d want to be in is were Financial Independence Number: Investment Income > Personal Money Needs.

Bottom Line

Typically, we tend to think of this number as our retirement number, but the beauty is that you don’t necessarily have to wait until retirement to achieve this. The bottom line here is that you know how to invest your savings and get the highest return to live off of…forever. This way, you can leave that job you hate sooner and focus on your passions or start that business you have been putting aside sooner. Having this amount stashed away will give you the freedom to pursue all the things that you love. I for one would like to hit the road and enjoy the sunsets.

Meanwhile, You can click on the following links to read more about financial planning


Disclosure: This information is provided to you as a resource for informational purposes only. It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.

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