Do you know how to calculate your **Financial Freedom Number (or Financial Independence “FI Number”). **Do you know yourÂ **savings rate** — the **key to Financial Freedom**? ðŸ’¸

**What is Financial Freedom (Financial Independence)? Do you have to Retire Early?**

First of all, what is Financial Freedom aka Financial Independence (the “FI” of the “**FIRE** Movement”: **F**inancial** I**ndependence **R**etire **E**arly).

**Financial Freedom / Independence** is reached when you have accumulated enough **income-generating investments** that you can **live off that income alone rather than being dependent on job income**. Financial Independence is often associated with retirement. Once you are financially independent, **you can choose to continue working or not.** Retirement is often associated with being age 65-67. The truth is **some people have managed to reach Financial Independence** (even a high-expense retirement or “FatFIRE“) **in their 30s or earlier. **Even if you want to retire at 67 or not at all, Financial Independence is a great goal for everyone due to the freedom and peace of mind it provides.

Knowing how to calculate your Financial Independence Number “Fi Number” is critical.

**How to calculate your Financial Freedom Number / Financial Independence Number**

Simply, your Financial Freedom number is **calculated by multiplying your average annual expenses by 25**. (How to calculate your annual expenses).

**Financial Freedom Number = Annual Expenses x 25**

This calculation is based on the principle that 4% is a “safe withdrawal rate”. This assumes you could withdraw **4% of the total value of your investments** without depleting your original investment —** indefinitely**.

**This 4% safe withdrawal rate assumes:**

- 7% Average annual investment return
- – 3% Inflation
**= 4% Safe Withdrawal Rate**

**What about a recession? Adjust your spending**

Understandably, your initial reaction to these assumptions is likely, “What if the market crashes? What is inflation is sky-high?” You’re correct — both of these are real possibilities. For this reason, **the 4% “safe withdrawal” rate **assumes you would** lower expenses during a recession**.

**What if I want to assume a different safe withdrawal rate?**

To assume a lower rate of return (I would not recommend assuming higher):

** FI Number: (100/Withdrawal rate) * Annual Expenses.**

For example, if you want to assume a **3% Rate of Withdrawal** (6% return – 3% Inflation), your FI number would be:

FI = (100/3) * Annual Expenses, or about** 33.3x your annual expenses.**

**How do I calculate my annual expenses?**

**Current expenses +/- anticipated adjustments**

First, start by figuring out how much you spend now by tracking your expenses. My favorite budgeting tool is YNAB (~$7/mo) or you can use a free option like Mint.

**Make adjustments as needed to arrive at your estimated future annual expenses.**

Second, some potential adjustments might include:

**Increased health care expenses**(For example, if you plan to quit working before you’d be old enough to qualify for medicare)**Decreased housing costs**(As a homeowner, once your mortgage is paid off, that payment would eventually end)**Increased travel expenses****Decreased work-related expenses**(gas for commuting, new clothes, etc.)

**How long will it take me to reach Financial Freedom?**

Next, how long it will take you to reach Financial Independence is determined by your savings rate. The **higher your saving rate**, the s**ooner you will arrive at Financial Independence**.

**How to calculate your savings rate? (Savings Formula)**

Your savings rate is calculated as a** percentage of after-tax income** (**gross income minus all taxes**).

**Savings rate** = **Annual Amount Saved (Invested)**Â / **Net Income**

Net Income = Gross Income minus All Taxes

Alternatively, another way to calculate your **Net Income:**

**Net Income** =** Take-Home Pay + any 401k contributions, HSA contributions, other savings taken out of your paycheck**

**Example of how to calculate savings rate:**

Let’s say your gross income is $50,000 minus $10,000 in taxes. Your net income would be $40,000.

If you contribute **5% of your salary to your 401k ($2,500)** and your** employer matches half of that ($1,250)**, you contribute **$3,600 toward your HSA** (which you opted to invest and save/pay for health care costs out-of-pocket) and you put **$6,000 in a Roth IRA** every year, your total amount saved/invested annually would be:

$2,500 + $1,250 + $3,600 + $6,000 = **$13,350 Annual Amount Saved/Invested**

$13,350 (saved/invested annually) / $40,000 (gross income) = **33.3% Savings Rate**

What if you are starting with a nest egg of zero? If you kept your savings rate up 33%, **you would be able to retire in 25-28 years** (see chart above).

For example, if you started saving 33% of your net income at age 25, you’d be financially independent around age 50-53.

Alternatively, if you’re starting at age 40, you’d retire around 65-68.

**Do people actually become financially independent and retire early?**

Lastly, is financial independence and early retirement achievable? Yes, it is! The most famous example is perhaps Mr. Money MustacheÂ who retired at age 30. He is famous for living a relatively low-cost life. Do you want a higher expense lifestyle? You’d be in the “FatFIRE” camp (high expenses). This requires building a larger net wealth, but this couple will retire in their 30s while continuing to live high-travel, high-expense lives in the LA California area.

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