Financial Independence Number

According to the trinity study, based on the 4% rule, you can calculate your FIRE number by

Financial Independence Number = yearly living expense x 25

If you withdraw 4% of your total asset annually, it will be sufficient for you to live while still preserving your wealth because your investment return is expected to be at least 4% per year. If you want to learn more about how this works, you can read my article <Do This To Retire Early>.

As you can imagine, the lower your yearly and monthly living expense is, the smaller your FI number will be. And the faster you can achieve financial independence.

Let’s see a concrete example:

• Sarah’s yearly living expense is $40,000. So she needs to accumulate $40,000 X 25 = $1,000,000 total asset in order to be financially independent.

• Sally’s yearly living expense is $20,000. They live in the exactly same city but with a different lifestyle. She needs to accumulate $20,000 X 25 = $500,000 in order to be financially independent. That is only 50% of what Sarah needs.

If they earn the same salary of $5000 per month and have an average of 8% investment return, and have 40 years to live after being financially independent.

• It will take Sarah 25.8 years to achieve financial independence

• It will take Sally 12.2 years to achieve financial independence

The table below is a general calculation based on your savings rate and years till retirement. The assumed investment return is 5% after inflation.

Being Frugal to Increase Saving Rate

Being frugal can drastically increase someone’s saving rate and shorten the years to achieve financial independence. Thus many people jump on the boat and try to be frugalists. If you lower your monthly living expenses to the extreme it also means that when you are financially independent, you still bound to this living expenses level. A recent video I watched about a german blogger, Oliver, who plans to retire at 40 as a frugalist.

Another video from an Austrian girl explained how she planned to achieve FI by 35. She quoted her planned FIRE number is 500,000 euro and monthly living expense is 1500 euro.

I personally find this strategy a bit disturbing. Although their intention was good and can educate a lot of people to save and be cautious about their spending, it can mislead many as well.

There are 3 main reasons I think being frugalist to achieve financial independence is a bad strategy:

1. A limited budget means limited freedom. 1500 euro per month to live for the rest of your free life is not a lot in Germany. When you achieve financial independence at age of 35 and have a 1500 budget, what will you do? Yes, many will argue, then they can find a job their love, then they can do hobby project, then they can…

   So you save and live frugally all those years just in order to do something you love and not work?! Why not find a job you love now?! Why not start your hobby project as a side-hustle now?! Why not do something that brings your joy now?!

   If being financially free is so important, I can’t see how the person can be free with a minimal monthly budget. If you want to travel, you have to plan carefully. If you want to support some family members, you have to think twice or you can not at all. If you want to invest in a business, you can not. If you want to do anything that exceeds the 1500 euro per month budget, you do not have the freedom to do so.

2. Settling for less is another way of being lazy. At age of 30 to 40, it is the golden time for you to create value to the society and community by providing your expertise through your job or personal projects. You learn as a person, you develop professional skills, you can teach others and create more social value.

3. Ignorance of increasing earnings. Being frugal means being extremely careful about spending, down to the pennies. As a young person, you should cultivate good money habits, not spend carelessly. But you should not focus solely on how to save, instead, you should focus on how to improve yourself, how to level up your skills, how to be more valuable to companies, and generate more earnings. So your market value will keep increasing as your keep leveling up your skills. Invest in yourself before investing in being frugalist.

   Let me give you a simple example:

   • Sarah invests $20,000 in herself on weekend school, professional training. She then finds a job that pays her $120,000 a year or $10,000 a month. Her savings rate is ($120,000 – $40,000)/$120,000 = 67%.

   • Sally earns $60,000 per year as usual. Her savings rate is ($60,000 – $20,000)/$60,000 = 67%.

   They both have the same saving rate but living a completely different lifestyle. As Sarah has double the living expense budget as Sally, she is able to travel, living in a comfortable apartment, support her families and save more to invest in herself. They both can achieve financial independence within the same number of years. After that, Sarah has so much more choices than Sally because she has the financial means to try more things.

   ‘Saving’ can only do so much. ‘Earning’ can do much more.

Invest in Yourself First

If you want to achieve financial independence, being cautious about spending and try to increase your saving rate is a great practice. But if you are still in your 20s or early 30s, do not blindly use the formula to calculate how many years does it take you to retire and plan a minimum monthly budget. Even when you achieve it, you can not do more as you don’t have the “spending” freedom. What you should do is:

1. cultivate good money habits.

2. invest in yourself and be professionally employable.

3. find a job that fulfills you, so you don’t need to hunger for the financial independence day that you can quit. Do something that you love now.

Learn how to achieve financial independence the right way, with the Fast Track Money Course.