Use the FI Formula to Find Out How Much You Need to Be Financially Independent
When we talk about saving money , we usually don’t consider how much you really need to save, since every situation is different. Here’s how to calculate the total amount needed to achieve financial independence.
As personal finance site Money Crashers explains, the total amount of money you need to save over your life so you can stop working is determined by how much you spend each year divided by your safe withdrawal rate (or how much money you can safely withdraw from your savings every year, without risking to run the well dry). Knowing this, you can determine how many years it will take you to reach this number:
Essentially, the formula for financial independence has two parts. The first part calculates your FI number – the total amount of money needed to generate sufficient income for a lifetime:
- FI number = annual expense / safe withdrawal rate
The second part of the formula uses your FI number to calculate how many years it will take you to reach FI:
- Years Before FI = (FI Number – Amount Already Saved) / Annual Savings
This is only a rough approximation, but good enough to give you an idea of how far you are from FI right now. Once you know this, you can start taking the next steps to achieve personal financial independence faster.
We usually think of this as your retirement number, but you don’t need to be at retirement age to reach that number. The important thing is that you know how to properly invest your savings and get a high enough profit to live on. You can read more about how to calculate this number at Money Crashers below.
How to Become Financially Independent Fast with the FI Formula | Money crashers