The Money Guy.
I’ve always been the numbers guy in our relationship. Long term budgeting and money stuff has always come easy to me. So it was natural to me when I fell into the role of handling our finances.
For the most part it was easy. Make sure the income exceeds the spending. If for some reason the spending goes above the income, it was my job to project out when the debt would be resolved. If we thought to forecast out a large purchase in the future, I would try to make sure we could pay for it in cash.
This was largely how my wife and I thought about money. We had invested some in real estate a few years prior, but just rudimentary stuff. However, as far as retirement goes, we were wandering around in the blissful ignorance that everything would be fine.
It was a bit of a shock to my system when my wife came home with radical ideas about no longer working in seven years. I honestly wasn’t even sure if what she was saying was possible. I mean how could we possible afford to not work, and pay the bills?
Financial Independence
She had recently been introduced to the Financial Independence to Retire Early (or F.I.R.E.) movement. The goal of FIRE is to save enough money early in life that you can stop working and do what you want. The money saved serves as a nest egg, and the capital gains are what you live on.
At first the idea was just too foreign for me to accept. I couldn’t understand how it would be possible to finance a retirement from the age of 42 onwards. In my mind the amount we would need to save would be far too high.
The Numbers Worked Out
The first step was to figure out how much money we NEED. What I mean by that is how much do you need to survive? If you could eliminate as much debt as possible, what would you be left with? Lets do some napkin math:
Here is a sample budget: (just placeholder numbers)
Mortgage: $2,225
Utilities: $200
Car Insurance: $60
Cell Phone: $100
Groceries and Incidentals: $1000
Monthly Grand Total: $3585
Now I know that most people are looking at the number and thinking, “but what about the car payment, or the house cleaners” blah blah blah. But realistically, do you NEED those? Most cars can be paid off in the time it takes to achieve Financial Independence, and once you’re not working anymore, you can clean your own toilets. Now, your mortgage or car insurance may be different from my numbers, so feel free to substitute your own numbers, but for this example $3585 is what you need to live.
Keeping it going.
Next, you need to have enough money in the bank to be able to draw $3585 out monthly, without running out. This is where the math starts to get a little tricky. You need to have 25 times your yearly requirement in order to draw what you need without running out.
So here we go:
Yearly Income Required = $3585 x 12 = $43020 Annual Requirement
Annual Requirement $43020 x 25 = $1,075,500
Financial Independence Number = $1,075,500
I know that seems like a lot, but we’ll cover how to get there in another post. (to be honest, I’m not sure we’ll make it there by 42..) For now, we just need to focus on the idea that this number is correct, and that by achieving it, you can simply stop working an start spending time doing the things you want to do.
Once you have achieved your own Financial Independence Number you can continue to live off of the earnings so long as you adhere to the 4% Rule. In a nutshell, it means do not withdraw more than 4% of you total sum in a given year. This ensures the market returns will replenish the 4% that you have withdrawn. We’ll talk about that more later.
A new perspective on finances and money.
I’m still learning about all of this as I go. But my wife had been an amazing catalyst in changing the way we look at money. She has made me realize that the most valuable resource we have is our time. And now, we are on a course to spend more of it together.
We are just starting on our journey to Financial Independence, and I promise I will share all of our stories along the way. In the meantime I hope you keep checking back with us. And I hope to see you in TheBreakaway.
