30-Day Investing Challenge, Day 3: Know Your FI Number
One of the best mindsets to have when starting your investing journey is to “begin with the end in mind” — quote from Dr. Stephen Covey, author of 7 Habits of Highly Effective People. Basically this means you have to know what you’re saving and investing for so you know the best strategy.
One of these end goals is knowing your Financial Independence or FI number. This is the amount of liquid assets (i.e. easily accessible assets) you need to quit working forever. Many people call this your “retirement” number, but I like to shy away from that word because it raises such a stink in the financial world. People REALLY hate when you say you want to stop working for some reason. Another phrase you can use is “FU” money, which I love because it’s feisty. If you were to have this amount of money to your name it means you can say f**k you to any situation you don’t want to be in, like a toxic job or living in a place you hate. It’s your free-to-do-whatever-you-want number.
Now, you don’t have to quit working when you reach this number. It simply means work becomes optional, which opens up a whole new world of possibilities. Love books? Work at a bookstore or library! Love baseball? Be an umpire for a little league! Love animals? Volunteer at an animal sanctuary! Once you have enough money where you don’t have to rely on a job to live your life the opportunities are endless.
Action Step: Calculate Your FI Number
The FI formula is simple: 25 * annual expenses. That’s it.
This is based on something called the 4% rule, which was discovered by financial advisor Bill Bengen, who conducted several simulations of historical stock market behavior and concluded that a person could safely withdraw 4% from their portfolio without running out of money. The rule was later substantiated and popularized by the Trinity Study.
For example: if you have a portfolio of $1 million you can safely withdraw $40,000/year in perpetuity. Therefore, if your annual expenses are $40,000 and you multiply that by 25 you get $1 million. Hence why the FI calculation is based on the 4% rule.
These numbers can seem daunting, but it’s good to know what you’re aiming for. A great way to make this seem less overwhelming is to break it into smaller chunks.
Bonus Action Step: Play With an Investment Calculator
One of my favorite calculators is NerdWallet’s investing calculator. Try plugging in some numbers and determine how much it would take per month to get to your FI number. This will help break down the large goal into smaller pieces and help you see what it would take to reach financial independence. Keep this calculator saved, because we’ll be using it a lot in the upcoming challenges.
For tomorrow’s challenge we’ll be looking at short term goals, so check back in!
Ready to start your journey to financial freedom? My FREE step-by-step investing guide will help build your confidence by walking you through buying your first index fund.
Want to dive in deeper? My investing workbook “Your Journey to Freedom” will show you how to build the life of your dreams and teach you the fundamentals of the investing world.
