How to Achieve Your Financial Independence Number

Too often money = stress as purchases are thought and re-thought, or even put off, and discussions about finances turn into fights. But it doesn’t have to be that way.

Financial Independence is a place we all dream of living in. It’s that moment when we no longer need to work, no longer need to stress about where our next paycheque will come from – it’s the magic number that means you’re not only free in the present, but also secure in your future.

What is a Financial Independence number?

An FI number, or Financial Independence number, is the net worth you need to accumulate in order to become financially independent, in other words, it means having enough money saved up to support you for the rest of your life. No need for a salary, no need to keep putting in those hours – your FI number is your ‘walk away from it all’ ticket.

How to calculate your FI number

There are two steps to this: 1. Calculate your FI number and 2. Determine how many years it will take to reach that number. Based on your current rate of spending versus saving, you can get a rough estimate of how much money you need to live on, and how many years it will take to accumulate that amount.

Step 1. Calculate your FI Number

To calculate the total amount of money required to give you sufficient income for life, use this formula:

FI Number = Yearly Spending ÷ Safe Withdrawal Rate

Yearly spending

This is easy to calculate if you have a budget, or use an app that tracks your spending. If you don’t use a budget, or a budgeting app at all, the first step to Financial Independence is to create a budget and track your spending. Once you have a grip on how much you’re spending year over year, you can plug it into the calculation along with your safe withdrawal rate.

Safe withdrawal rate

This is the percentage of your savings you can withdraw without digging into the principal amount. Most experts agree you can safely withdraw around 4% of your savings year over year. We recommend calculating at a 4% safe withdrawal rate, but if that number causes too much stress, you can also decrease it to 3.5%.

So, for example, let’s say you spend $40,000/year, the calculation would look like this:

Financial Independence number = $40,000 ÷ 0.04 (or 4%) = $1,000,000

Step 2. Calculate the number of years needed to reach your FI Number

To determine the total number of years required to accumulate your FI Number, use this formula:

Years to Reach FI = (FI Number – Amount Already Saved) ÷ Yearly Saving.

Most of these numbers are fairly straight forward. You’ve already calculated your FI number, and the amount you’ve saved should be easy to get. And, your yearly savings should be available from your budget. Pop those numbers in, and the answer is the amount of years required to get there.

Continuing with the example above, let’s say you have $100,000 in savings and $1,500/month going towards those savings. The calculation would look like this:

Years to Reach FI Number = ($1,000,000 – $100,000) ÷ $18,000 = 50 years

In this scenario, your Financial Independence number is $1,000,000, and it will take 50 years to reach it.

It’s important to remember this calculation does not take into account inflation, any growth from interest rates, or from wise investing. The sooner you invest, the faster you can reach Financial Independence. Furthermore, your Canadian Pension Plan, OAS, RRSPs, and private pension will greatly change your financial reality post-retirement. These will help offset living costs, lowering your FI after you retire.

How to Achieve Financial Independence

No matter where you are in your quest for Financial Independence, there are helpful tools to realign your course and quicken the growth of that magic number. These include:

Create a Budget: List your regular expenses, from mortgage payments to donations to your daily coffee habit. Also include those infrequent expenses such as property taxes, insurance payments, and even emergency funds or that rainy day fund. Add it all up, and you’ll know your total yearly spending. The lower this number is, the faster you’ll reach your FI Number.
Pay Off Debt: Ridding yourself of extra debt not only means less stress, but also frees up more money for investing in your future.
Cut Down Expenses: There are tons of ways you can cut down your expenses, from using more public transit, to going down to one cell phone – or even opting out of Netflix (gasp!). Every little bit counts when it comes to saving up for Financial Independence.
Maximize Your Income: Whether it’s getting in line for a promotion or creating a side-hustle like dog walking, there are many ways to help maximize your income.
Save and Invest: Because saving alone is usually not enough, especially for small business owners, it’s crucial to implement both strategies to help grow your wealth and reach that FI Number sooner. Talk with a trusted financial advisor today about your saving and investing options.

Becoming independently wealthy

Being free of the need to earn money from working doesn’t necessarily mean you should stop working. It just means you no longer need to rely on your job to make you enough money to survive – because you’re already there!

Financial Independence opens up so many doors for your life. By reaching that magic number, you’ll have more time to do all those things you’ve always wanted to do: take up golf-lessons, volunteer more, start a new business, spend more time with the kids and grandkids, travel the world – or just relax with a cool drink on your porch, and fully enjoy the space financial freedom gives you.

At Bayview Financial, we want to help you reach your Financial Independence number! Contact us today for the crucial next steps.