Financial Independence: What’s your number?
By Jonathan Goodman
This article is published on: 16th February 2015
What does financial independence mean to you? Are you on track for a future free from financial stress? Do you know what your number is?
Knowing the answers to these questions could help determine how soon and how well you could retire, yet many of us don’t…
If you are financially independent you have amassed enough wealth to generate a passive income sufficient for meeting all financial obligations, without the need to work. Your potential for financial independence is dependent on your current net worth, your target net worth and the years remaining before retirement, as well as how much you spend. The more money you spend now and going forward, the more you will need to accumulate to support your lifestyle.
So how do you calculate exactly when you could comfortably retire?
The first step towards financial independence is to calculate how much you’d need to save. A simple formula can tell you not only how much you will need, but also how close you are now to getting where you want to be:
- Study your statements and determine how much you require annually in order to meet all your financial obligations. Could this number be reduced? Are there any unnecessary expenses? Could home and car insurance premiums be reduced? Is downsizing your home an option?
- Determine what return you could get on your investments. As intimidating as the stock market may seem at first glance, it’s possible to assemble a portfolio that pays you 3-5% in dividends annually. This dividend income is cash paid to you monthly, quarterly, or annually and doesn’t erode your investment.
- Calculate what nest-egg you need to build to generate the annual income you require. Annual income required divided by the percentage return you expect to get. Calculations should include cash only, not property or assets.
- This calculation does not account for inflation or taxes.
- This calculation only covers essential expenses. Determine how much spending money you need monthly, then calculate the annual amount and add it into your figure.
- Your life could change in the next few years, which means you’d have to recalculate. If you decide to upgrade your home or have a family, you’ll need a bigger number.
What’s Your Number?