How to calculate your Financial Independence (FI) Ratio

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For the first time, I’ve computed my Financial Independence (FI) ratio. In this post, I’m going to explain to you what is FI and how to compute your FI ratio.

First, what is Financial Independence (FI) ?

It’s when you have enough money to sustain your lifestyle without working. For this, your wealth must generate income. And this income must be greater than your expenses. The main way to generate income from your wealth is simply to withdraw from it. However, you need to withdraw little enough to sustain your wealth for the longest time.

You may have heard of the 4% rule. It states that if you only withdraw 4% of your investment portfolio, it should sustain you for at least 30 years. This percentage is your Withdrawal Rate (WR) or Safe Withdrawal Rate (SWR). These rules assume that you invest your portfolio in the stock market. Generally, the rule assume 75% stocks and 25% bonds, but the asset allocation is up to you. 4% is the recommended SWR, but some people choose to be more conservative (<4%) or more aggressive (>4%). I am a bit more conservative and my SWR is 3.5%.

Now I got my SWR, how much do I need to be FI ?

In fact, it’s pretty easy. By dividing 100 by your SWR, you’ll have the number of years of expense you should save. For instance, for my SWR of 3.5%, I have to accumulate 28 years of my annual expenses. If you think your expenses are going to go up or down in the future, you should also account for that. You should use the amount of expenses you plan for FI. So, your target net worth is 100/SWR times your annual expenses.

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February 2018 Update – Vacation and wedding

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Edit: I changed the way I’m accounting for my life insurance, this gives me a savings rate of 4.2% now.

February is now done, it’s time for another monthly update!

I haven’t posted on this blog since the last update, I was in vacation in China for more than half the month. I hope to post more in March.

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January 2018 Update – Ph.D. and good savings

Posted on Categories Budget, Frugality, Goals, Monthly1 Comment on January 2018 Update – Ph.D. and good savings

Edit: I changed the way I’m accounting for my life insurance, this gives me a savings rate of 33.7% now.

It is time for another monthly update! After a good December 2017, the new year is up to great start in January with year another very good month ๐Ÿ™‚

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Goals for 2018

Posted on Categories Budget, Goals1 Comment on Goals for 2018

For once, I’m gonna try to set clear goals for this year! I’ve set up a nice spreadsheet for my goals for this year (credits to retirebyforty for the spreadsheets idea):

My 2018 Goals

I’ve tried to not set goals that are too high but still strive for better than this year. This is my first attempt at setting yearly goals, so maybe I’ll add new goals during the year, but I’ll not remove any goal nor downsize any goal.

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