When planning for financial independence, there are a few key numbers that are the most important for you to get super-familiar with. With a little planning, you’ll know some of these like the back of your hand. Right now they may all seem like far off concepts that will take months or years to wrap your head around – but that’s OK!

Getting to know these numbers takes time – maybe even years. They’ll change over time as you and your life change. They’ll spike at times and you’ll realize how off you were. All of that is also OK – it’s all part of the learning process. The more you can predict your numbers, the more likely you are to hit them when it matters.

Let’s go over these core numbers one by one.

#### Your Yearly Spending Today

It’s shocking how many people don’t know how much they spend in a month or a year. If you’re working you probably have some idea based on how much (or little) you’re putting away into savings. This number has a lot of uses!

- Use it as a baseline for optimizations as you reduce or increase spending.
- You’ll know exactly how much you need to live – which allows you to understand how much you need to earn in a job to break even (it might be less than you think).
- It’s also used in just about every calculation below!

**How to calculate it**: The long way to calculate yearly spending is to add up every single transaction you made over the course of a year. This is a LOT of work, and not a good place to start.

An easier way to is to add up all of your paychecks over the previous 12 months (excluding this month). This is the money that was deposited into your bank account after taxes, 401(k) contributions, and everything else.

Next, find out what your bank account balance was 12 months ago. You can usually get this from a bank statement 13 months ago and look at the ending balance.

Add up all transfers out of that account and into savings over the 12-month period. Remove any money that was transferred into stock investments, or other liquid accounts. If you made a large purchase like a car or a house you can remove that too (we’ll look at it in the next number).

Lastly, get the ending balance of your bank account from your most recent monthly statement.

At the end you might have something like this:

Details |
Expense |

Paycheck | $60,000 |

Starting Balance | $5,000 |

Ending Balance | -$8,000 (use a negative for it) |

Total transfers to savings & investments | -$9,000(use a negative for it) |

Total Yearly Spending: |
$48,000 |

At a glance this makes sense. They added $3,000 to their checking account ($8,000-$5,000) and put aside another $9,000 for a total of $12,000.

This gets much more difficult when you have large purchases during the year – major home repairs or renovations, down payments, cars, college, etc.

If you want to get fancy with this, you could divide your spending into two categories: **total yearly spending** and **baseline yearly spending**. Major purchases that you don’t make every year would be subtracted from the total yearly spending to get your baseline yearly spending.

We’ll use both of these to calculate our next number.

#### Your Future Spending Per Year When Not Working

Future spending per year is one of the hardest things to calculate. The more you know about how much you’ve spent over the past year (or even the past few years) the better you’ll be at calculating future spending per year.

I call this my *yearly spending estimate*. It’s an estimate of how much you’d spend to do everything you want to do when not working.

The beauty of this number is that it takes into account one-off purchases down the line. New car every 10 years? New roof every 15 years? Healthcare costs in early retirement? Want to go on a ski trip every 4 years? How about paying for college for kids? It’s all in there.

No formula and planning can predict everything. This is a good **starting point**. Your actual spending may be much higher in some years and much lower in others. The hope is that by setting a higher than usual estimate it helps pad your spending.

**How to calculate it**: Read through the post and try it out for yourself to calculate the high end of your yearly spending. You can estimate your future spending by using this formula:

Your “high end” number should take into account everything from house purchase to medical care. Your low end should be the minimum amount you could see yourself spending while still being happy and comfortable. If you’re planning to live in your house long-term and pay off your mortgage, this is a good place to calculate your yearly spending without that included. Don’t go so low that you’re unhappy.

If the result is higher than your baseline spending that means you believe your lifestyle will rise during retirement. If it’s lower, then you believe you’ll spend less. Either way, you’ll have a good estimate of how much you’ll spend per year going forward.

Ideally, you want this number to be **your average spending over time**. There’s no point in estimating your yearly spending than to exceed it every year. If that happens then your estimate is too low. This exercise helps set a realistic baseline.

#### Your Minimum Financial Independence Number

Once you know your *financial independence with options number*, you’re ready to calculate your financial independence number! This is the amount of cash you’ll need to be saved up in order to consider yourself financially independent – possibly for life.

**How to calculate it**: Take your yearly spending estimate and multiply it by 25. If your yearly spending estimate was $100,000, then your minimum financial independence number would be $2,500,00.

**Why it’s important**: According to the 4% rule if you save up 25x your yearly spending, invest it in a portfolio of diversified index funds and withdraw this amount (after taxes), then you’re set to live off of it for **at least 30 years **(and usually forever). There are caveats left and right about this of course – past performance is not a guarantee of future performance, your expenses might change, taxes might change, etc – but 25x is a good minimum baseline.

When I learned how much my 4% amount was it inspired me to get moving! Before that, I had never considered early retirement. I always assumed that I’d need $10 million to retire – or that it would just magically happen sometime in my 60s. Calculating this number gave me something to shoot for, something to save for!

It may seem far off now – and that’s OK! Every journey has to start somewhere. Whether you’re in your 50s and just starting to learn how to invest or fortunate enough to find this in your 20s, the path forward is the same: one day at a time.

One note about this number: it’s based on liquid investments in a bank or investment account. These aren’t your net worth that includes your house, car, and other assets. I’ve written about how Your House Doesn’t Count Towards the 4% Rule if you want to know more about why. If it’s part of your plan to downsize and sell your paid-off house, your calculations will look very different.

#### Your Savings Rate

Once you know how to invest and know how much you need to reach financial independence, your financial life becomes a waiting game. You’ll put more and more money aside and if you keep at you’ll get there… someday.

One way to help calculate how long it will take to get there is your *savings rate*. Your savings rate is the percent of your income that you’re saving each year.

**How to calculate it: **If you’re saving rate is 0%, then you’re not saving anything. If your savings rate is 100%, it means you’re saving every penny (and also not spending anything).

The higher your savings rate, the more money you’re saving, and the faster you’ll reach financial independence! Let’s look at our previous example and add in a 401(k) contribution.

Details |
Expense |
Savings |

Paycheck | $60,000 | |

Total savings: | $12,000 | |

401(k) Savings | $5,000 | $5,000 |

401(k) Match | $2,500 | $2,500 |

Total: |
$67,500 | $19,500 |

Savings Rate: |
28.8% |

We add the 401(k) contribution as well as the match here on both sides since it’s income, and it’s being saved. I prefer using the after-tax number for the paycheck as well since those aren’t something within my control to adjust for.

**Why it’s important: **On a month-to-month basis you might not see much change in any of your other numbers. Sometimes the markets even go down which brings you farther away from your goal!

Your savings rate is one number that’s completely within your control. Regardless of how much you need to reach FI or how crazy the markets are, you can calculate out your savings rate.

This can be calculated yearly, but it can also be done monthly if you’re slightly OCD about numbers (yeah, I’m talking about myself – and maybe you if you’re reading this). When I was working, I’d track and graph this monthly as a quick reference to understand if my spending was increasing too fast. This is effectively using your savings rate as a lifestyle inflation canary. For extra points you can calculate a 12-month moving average of your savings rate month by month. This levels out the spikes and gives a clear indication if your savings rate is increasing or decreasing.

Your saving rate can also be used to quickly see a snapshot of how long it would take you to reach financial independence. This is a quick estimate assuming you have $0 in existing savings and are starting today, but it’s still nice to know.

## Savings Rate vs Years to FI

If you maintain this savings rate, with consistent investment growth, you’ll reach FI in this number of years.

In our previous example, a 28.8% savings rate would reach financial independence in about 29 years. That’s assuming their income, savings, and spending stayed exactly the same for 29 years, and that they invested it in the stock market which grew by 7% a year.

Most people will see their income rise over the years as they rise in the ranks of their job. If they were to save these raises they’d see their savings rate rise! They could also figure out ways to lower their expenses, which would allow them to save more.

Savings rate, yearly spending, future yearly spending, and your financial independence number are the four key numbers that will determine when you’ll reach financial independence. Behind the scenes all of these numbers come down to two things: how much you earn and how much you spend. I’ve seen many people become obsessed with lowering their spending to save more. Remember that you can also increase your income! Those that attack this problem from both ends – lowering spending and increasing income – reach financial independence the quickest.