How to calculate a "fi number"?
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Calculating your Financial Independence (FI) number involves a few key steps to estimate the amount of savings needed to achieve financial independence. According to experts from the podcast, here is a simplified guide:
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Calculate Annual Expenses: Start by determining your total annual living expenses. This includes all your regular monthly expenses, such as housing, food, transportation, and any other recurring costs. Multiply your monthly expenses by 12 to get the annual total.
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Multiply by 25: Once you know your annual expenses, multiply that number by 25. This multiplication is based on the 4% rule, which suggests that if you withdraw 4% of your savings each year, your money should last through retirement. For example, if your annual expenses are $40,000, your FI number would be $1 million ($40,000 x 25) 1 2.
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Adjust for Future Variables: Consider factors like inflation, healthcare costs, and potential changes in your lifestyle or spending habits. Future inflation will affect your purchasing power, so it's crucial to adjust your calculations to account for this 3.
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Include Additional Income Sources: If you have additional sources of income like pensions or Social Security, adjust your FI number accordingly. Subtract these guaranteed incomes from your annual expenses before multiplying by 25. For instance, if you have a $40,000 pension and annual expenses of $60,000, your adjusted expenses would be $20,000, making your FI number $500,000 ($20,000 x 25) 3.
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Consider Life Changes: Account for significant expenses that may decrease (e.g., paying off a mortgage) or increase (e.g., healthcare costs in later years) over time. Planning for these changes will make your FI number more accurate 4 1.
Following these steps should provide a solid foundation for calculating your FI number tailored to your specific financial situation and goals.
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