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Financial Independence Calculator: How it Works

You may have heard of financial independence and may have come across a financial independence calculator, but what does it do, and how does it work? In this article, we will briefly discuss financial independence, financial independence calculator, and how the calculator works. We also will take a cursory look at the concept of Financial Independence, Retire Early, known as FIRE, and how the FIRE calculator, popularly referred to as FIRECalc, works.
 

WHAT IS FINANCIAL INDEPENDENCE?

Financial independence has been widely discussed both in the digital and print media over the past few years. It has gained traction in recent times due to the negative effects of the coronavirus on the economy. Available stats indicate that about two-thirds of Americans now live paycheck to paycheck after the coronavirus pandemic and the numbers are increasing by the day. Thus, most Americans are not financially independent. Financial independence means you don’t live paycheck to paycheck but have enough money to take care of your present and future needs.

However, the road to financial independence may be different for everyone. According to statistics, with all things being equal, it should take an average American between 5-10 years to become financially free, but things don’t always work out that way. That is why you need a financial independence calculator.
 

IMPORTANCE OF A FINANCIAL INDEPENDENCE CALCULATOR

A financial independence calculator can give you a fair idea of how long it will take you to achieve financial freedom if you stick to a certain plan. Since the journey is different for everyone, the financial independence calculator makes sure it considers all the necessary factors to ensure that its prediction is accurate for every individual. Thus, you can tell when you’ll become financially free and use that as motivation.

It also helps you to prepare and work towards achieving financial independence by mapping out practical and realistic strategies that would help you become financially free. Benjamin Franklin once said, “If you fail to plan, you are planning to fail”. This means if you fail to have a solid financial strategy that’ll help you become financially free, then you are bound to live pay-check to paycheck – even after retirement. A solid financial plan based on the predictions of a financial independence calculator is your one-way ticket to financial independence. Thus, you won’t end up opening doors at hotels or grocery stores just to make ends meet after retirement. What is most refreshing is that, with the help of a financial independence calculator, you can retire early.

The concept of Financial Independence, Retire Early (FIRE)
The idea of retiring early has whipped up interest among the populace in recent history. This has led to a movement known as Financial Independence, Retire Early (FIRE) which was founded in 1992. The core message of the movement is to save about 70% of annual salary through frugality and extreme means, retire earlier than regular retirement plans would allow, and live off small withdrawals from the money saved. Proponents of FIRE rely on the FIRE calculator, popular known as FIRECalc, to predict how early they can retire.
 

THE PRINCIPLE OF FINANCIAL INDEPENDENCE, RETIRE EARLY CALCULATOR

The principle on which a FIRE calculator works is simple: save 70% of your annual salary through frugality and extreme savings plans and live off small withdrawals after retirement. Typically, proponents of FIRE would retire when their savings hit 30 times of their annual income which is estimated to be $1million on average after which they’d live on a yearly estimate of 3%-4% of their accumulated funds.
 

HOW THE FIRE CALCULATOR WORKS

The financial independence retire early calculator will require your current age, annual income, yearly expenses, investments, savings, and retirement. When the values of all these and other factors are entered into the FIRE calculator, it will generate your FIRE Goal, which is the amount of money you’ll require to retire early. Then the calculator will also provide the FIRE Age, which indicates the age that you can retire. This is different from how a financial independence calculator operates.
 

WHAT IS A FINANCIAL INDEPENDENCE CALCULATOR?

As the name indicates, a financial independence calculator helps you to know how long it’ll take you to become financially free. It does this by factoring in certain conditions that may inhibit or promote your financial freedom. It guides you by helping you to map out strategies that would help you offset your debts and prepare for retirement. A financial independence calculator is a great tool if you want to enjoy the freedom that comes with financial independence.
 

HOW A FINANCIAL INDEPENDENCE CALCULATOR WORKS

  • It determines your Financial Independence Number
  • First, you need to determine your financial independence number. This number, also known as FI number, is a benchmark that determines when you don’t need to work anymore. The FI is a sum that tells you how much money you will need to go on retirement. It is determined by summing up your total annual spending and dividing it by 4%. To determine your annual spending, just take a look at your budget. If you don’t have one, don’t worry. With our GuardianWealth budget planner, you can draw a very comprehensive budget that will help you determine your financial independence number.

    Another way is to multiply your total annual spending by 25 instead of dividing by 4%. The FI number is not cast in stone, therefore, it can be adjusted to suit your situation. The main idea is to give you a savings target to aim at. For instance, if your total annual spending is $100,000, then divide the $100,000 by 4% or 0.04. Thus, $100,000/0.04 = $2,500,000. Therefore, your financial independence number, assuming your annual spending is $100,000, equals $2,500,000. That is how the financial independence calculator works.

  • It tells you how long it’ll take you to become financially free
  • Now that you have determined the financial independence number, the next step is to find out how long it’ll take for you to realize that FI number. This number, just like the FI number, is just an approximation. Chances are that you may even exceed the number if you work hard and stick to the plan. To find out how long before you realize the financial independence number, first subtract the amount you’ve already saved from the FI number and divide it by your yearly savings.

So, if your yearly saving amounts to $50,000 and you’ve already managed to save $15,000, then the number of years before you hit your FI number will be = ($2,500,000 – $15,000)/$50,000. Thus, the number of years it will take you to attain the FI number, according to the financial independent calculator, is 49.7 years. Remember, this is just a baseline or a blueprint to guide your financial decisions going forward. It is not cast in stone but can change depending on several factors such as economic factors, investments, salary increase/decrease, etc.
 

SAVING FOR FINANCIAL INDEPENDENCE

As earlier stated, the financial independence calculator only provides an approximation of the financial independence number and the time it’ll take to achieve financial independence based on your current annual expenditure and savings. This means that with more effort, you can maximize your FI number while minimizing the time you’ll need to become financially independent. All you have to do is to find ways to cut your annual spending or improve your savings and investments. Here are a few tips to help you maximize your FI number:

  • Settle all your debts
  • Debts drain our income more than any other item on the list of expenditures. So ensure you pay off all outstanding debts to give yourself a better chance of saving more money. While you’re at it, make sure you don’t incur more.

  • Reduce Your Expenses
  • This point can’t be stressed enough if your goal is to become financially free. Go through the list of expenses in your annual budget and trim them down. You can even sacrifice some expenses just to help you realize your financial freedom in the shortest possible time. If you need help on drawing a budget, try our GuardianWealth tailor-made budget planner today.

  • Maximize your income
  • The FI number provided by the financial independent calculator can be improved. To do this, be sure to explore other ways of maximizing your annual income. You can invest your money, save, utilize passive income models, sell your belongings, undertake a side hustle, etc. The aim is to increase your income streams to help you achieve your FI number in the shortest possible time.

In a nutshell, a financial independence calculator helps you determine how much you need to become financially free and how long it’ll take to achieve that. However, those rates are not fixed because they only account for your present circumstances. With a FireCalc, you can even retire early by lessening the time you need to become financially free and boost your Financial Independence number.

Financial Independence Calculator