Financial Independence: How to calculate your Financial Independence Number
Reports show that 70% of US citizens have less than $1,000 saved away in emergency funds, and 29% don’t have savings at all.
Plus, an average of 65% of Americans retire poor and depend on pensions. You don’t want to be in this category, right? That’s why it is essential to start planning early.
Financial independence means you no longer live on salaries, or rather, you do not work for money; instead, money works for you.
You need financial freedom to live your dream life, travel on your dream tour, and live a very flexible health-insured life.
In this article, you’ll learn the four critical steps required to achieve financial freedom, plus how to easily calculate your financial independence number (aka FIRE number) and know where your current FI status ranks.
What is a FIRE number?
FIRE in this context is an acronym for “financial independence, retire early.” To retire early and be financially free, you must apply this guide to reach that point in your financial life.
FIRE is a stylized colloquial financial term that encourages people to live below their means to save up or invest in businesses that could fetch them passive income.
Now let’s forge ahead to know the four critical steps required to reach your financial goals or retire early.
4 Critical Steps to Achieve Absolute Financial Freedom
The four steps include:
Financial Security
Financial Vitality
Financial Independence
Financial Freedom
Here are detailed explanations for them. You’ll also get a detailed method for calculating each one of them in the next section. Let’s forge ahead.
1. Financial Security
Security as a term means you are safe from troubles, there is peace of mind, and you go about your activities without any thought of possible downfalls or attacks.
Financial refers to everything that surrounds money, how you distribute and spend it.
On bringing the two terms together, financial security means being safe from financial troubles.
It means having enough money to cover current and long-term expenses, including emergencies/insurance.
Financial security provides peace of mind because you can stumble upon essential human needs such as food, clothing, and shelter and comfortably satisfy them without fearing losses or plunging into debts. Plus, you have total control of your money.
2. Financial Vitality
Financial vitality is the next step after achieving financial security.
In this phase, you have financial security and extra cash or pocket change to cover luxury and indulgences, such as going on a date night, getting a massage, going on a tour, and buying gifts, anything that adds fun to you and your family.
3. Financial Independence
In this category, you have financial security and vitality, plus you control your funds and make them work for you.
You no longer live at the mercy of your boss and from one paycheck to another.
You're a total of how you make and spend your money, plus you should have a list of investment portfolios and income streams by now.
4. Financial Freedom
Financial freedom is a totality of the preceding steps, including financial security, vitality, and financial independence.
You can say financial freedom is the “pro max” version of financial independence. In this category, you can comfortably retire and earn at your comfort.
You can go on any tour with your family, pay for luxuries of any kind; right now, investing in startups could be your daily goal.
It doesn’t end at this; you should also know how to calculate these critical steps to achieve your personal finance goals. Fasten your seat belt, let journey together to the FIRE calculator!
How to Calculate Your FIRE Number
In this section, you’ll learn how to calculate the various categories to achieve absolute financial freedom, including financial security, vitality, independence, and freedom.
How to Calculate Financial Security
An average American earns at least $34,668 annually. It is good to know how much you make monthly with your monthly expenses and your average annual basic expenses.
To calculate financial security, you must sum up your basic monthly expenses, which include:
Rent/Mortgage
Food
Transportation
Gas
Electricity bills
Insurance (Car, Household, Life/health, etc.)
Water
Home appliances or devices, etc.
Let’s assume these figures amount to an average of $4200 monthly, multiplying by 12 months. You have $4200 X 12 = 50400, which is your basic annual living expenses.
So, you do the maths. Are you financially secure? You can limit your expenses or figure out how to increase your earnings to meet up your demands.
How to Calculate Financial Vitality
To calculate your financial vitality number, you must add up the following:
Basic monthly living expenses ($4200)
½ of your household clothing allowance ($100)
½ of your household entertainment cost ($500)
½ of your monthly indulgences ($120)
Summing the figures up, you get $4,920.
Multiplying it by 12 months, you get: $4920 X 12 = $59,040, which gives you your Annual Vitality Expenses/ Number.
From this, you should know how much you need to hit to make up for Financial Vitality.
How to Calculate Financial Independence
To calculate your financial independence number, you must multiply your Financial vitality income goal by 25 years.
For instance: If your Financial Vitality goal is $60,000, multiplying by 25 gives you: $1.5 million.
So by having a net worth of $1.5 million in assets or saving should give you the financial freedom you desire.
Knowing your financial independence number enables you to know how much to throw into investments that will fetch you passive income streams and enrich you never to live at the mercies of strenuous jobs.
Conclusion
The key to achieving financial independence is knowing your limits and working towards breaking them. We all know our needs and wants, and it is natural to satisfy them at every point in time.
By abiding by the FIRE rules and knowing our FI numbers, we know what it could take us to get the absolute financial freedom we desire and retire early.
Get your copy of this week’s Success Sheets designed to help you calculate your F.I.R.E. Number.
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