What's your FI number?
Hello and welcome to another issue of my newsletter.
Yesterday, I published, as promised in an earlier issue, an article on Personal Inflation. It explains inflation, how it affects our budget, and how the rate of inflation of individual items significantly affects our budgets.
FIRE is an acronym for Financial Independence, Retire Early. FIRE is a movement that seeks to be financially independent and retire early. They seek to maximize savings and investment and or decrease their expenses to the barest minimum. The point is to get where their passive income(Returns from investment) provides enough to fund their lifestyle.
While there are arguments for and against methods, and if retiring early is actually worth it, I don’t intend to go through here. One aspect I find interesting is finding your number.
Finding your number is a question anyone who wants to be financially independent has to answer.
It is simply asking what the number that would make you financially independent is?
Some people would argue for $2M, others $20M some would say $25k and a job you love.
Here is the thing; to get your number, you know your annual spending and how many years you need to spend. Once we know these two things, you can estimate how much you will need to be financially free.
Let say your annual spend is 120k and you want to retire at 45 so you have another 30 years to live. Then you’d divide 120k by 4%1 which would give you $3M.
That’s your number assuming there is no other source of income.
Readings
Personal Inflation: The Negative Effect of Rising Cost of Goods on Your Budget
How Much Do You Need to Be Financially Independent?
The 4% Rule of Thumb for Retirement Withdrawals
That wraps it up for this week, and see you next Sunday.
This is the 4% rule; however, it is outdated and doesn’t respond to market conditions. The 4% rule assumes that you deplete your assets by 4% annually for 30 years. The point, however, is to multiply by, say, a safe rate like the inflation rate to account for rising prices of goods.