When we talk about saving money, we tend to leave out how much you actually need to save, since every situation is different. Here's how to calculate the total amount you need to become financially independent. Photo by SeniorLiving.org.
As personal finance site Money Crashers explains, the total amount of money you need to save in your lifetime so you can stop working is defined by how much you spend every year, divided by your safe withdrawal rate (or how much money you can safely withdraw from your savings each year without risking running the well dry). Once you know that, you can define how many years it will take you to get to that number:
Basically, the Financial Independence Formula has two parts. The first part calculates your FI Number — the total amount of money required to give you a sufficient income for life:
- FI Number = Yearly Spending / Safe Withdrawal Rate
The second part of the formula uses your FI Number to figure out how many years it will take you to reach FI:
- Years to FI = (FI Number — Amount Already Saved) / Yearly Saving
This is only a rough approximation, but it's good enough to give you an idea of how far away you are from FI right now. Once you know that, you can start taking the following steps to reach personal Financial Independence sooner.
Typically, we think of this as your retirement number, but you don't necessarily have to reach retirement age to achieve that number. The important thing is that you know how to properly invest your savings and get a high enough return to live off of. You can read more about how to calculate this number in detail at Money Crashers below.
How to Become Financially Independent Quickly Using the FI Formula [Money Crashers]