Your financial independence number is the amount of money you think you need in order to be free. Unfortunately, if nothing changes in your life after reaching your financial independence number, then the number simply is not real.
In this low interest rate environment, some people continue to believe once they achieve a liquid net worth equal to 25 times their annual expenses, they’re financially independent. Yet, once they get there, they continue to work at a job they dislike for years.
Why? Fear. They fear not having enough money to safely retire early or do something else. They fear a bear market will wipe away 20%+ of their net worth. As a result, they continue to work in order to accumulate even more money.
So much about money is mental. Since leaving my day job in 2012, I have seen countless examples of the one more year syndrome play out. If you actually want to change your life, please put the 4% rule to rest.
Calculating Your Financial Independence Number
Accumulating 25 times your annual expenses is the bare minimum. With low interest rates, elevated inflation, and lower-expected returns, the vast majority of people’s lives will unlikely change once they achieve this milestone.
If you want to change a suboptimal life, then you must accumulate more. Shoot to accumulate 50 times your annual expenses. At such a net worth, your courage to do something new goes way up. Interestingly, 50 times your annual expenses also is equivalent to the inverse of roughly where the 10-year bond yield is now, ~2%.
Personally, I’ve always used a target net worth based on a multiple of gross income. By using gross income as a variable, you can’t cheat by cutting expenses. Further, you remain disciplined in building more wealth as your income grows.
Once you hit a net worth equal to 10 times your annual gross income, that is when you will start to feel more free. And once your net worth reaches 20 times your annual gross income, that is when you will have absolute courage to do whatever you want.
We can crunch the numbers all we want to get the ideal financial independence number. We can also make fun of the Financial Samurai Safe Withdrawal Rate formula for being too conservative, even if we’ve never retired before.
The reality is, you won’t know how you will feel until you actually accumulate your target financial independence number. Therefore, if you haven’t reached your financial independence number, please keep an open mind. Chances are high that once you get to your number, you will feel differently than you imagined.
Your Financial Independence Number Might Be Fake If…
Your true financial independence number is one that leads you to change a suboptimal situation. If you think you’ve achieved your financial independence number, consider the follow scenarios.
1) Staying at a job you dislike
At some point, everybody is willing to suck it up and work at a crappy job to pay the bills. But if you still find yourself working at the same job you dislike after reaching your FI number, then you are probably not financially independent.
There is also a point to be made about greed. Let’s say you are making good money at a company that is a net negative for society. You have accumulated 20 times your annual salary, but you continue to work to produce a poisonous product. Some soul-searching may be in order.
2) Remaining in an abusive relationship
One of the main reasons why people stay in a terrible relationship is because they don’t have enough money to comfortably live on their own. Compound the lack of money with the shame of breaking up, and it is normal to see relationships last much longer than they should.
If you don’t have a prenuptial agreement, give up your career to raise your children for many years, don’t have a way to make your own money, and aren’t accumulating assets in your name while in a relationship, you are putting yourself at risk. Please strive for financial independence for both partners.
If you cannot leave a terrible relationship, then perhaps your financial independence number is not real.
3) Not defending yourself or speaking up against an injustice
Congrats on accumulating 35 times your annual expenses. However, if you’re constantly being harassed at work and aren’t willing to report the abuse to Human Resources, your financial independence number is probably not real. You are too afraid to speak up because you fear it might hurt your chances of a raise and a promotion.
Let’s say someone you know is constantly verbally abusing you online. Not only do they swear at you, but they also throw in racial slurs as well. If you don’t stick up for yourself and put them on blast, you may not be as financially independent as you think. In my experience, the best way to get bullies to stop is to fight back. Once you fight back, they tend to move on to pick on someone who doesn’t.
Even if you have not reached your FI number, never let anybody walk over you. You are not dirt, but a human being who deserves to be respected.
4) If you continue to work too many hours to make more money
There’s always another dollar to be made but never another second. Therefore, if you continue to dedicate a lot of time to making more money after you’ve achieved your financial independence number, you are probably fooling yourself.
If you’re telling people you’re relaxing in a cabin in upstate New York, but are secretly working 50 hours a week on your business, you’re probably not financially independent. If you end up selling your business and then create a new business to teach people how to make money selling businesses, then maybe you are addicted to money.
It’s understandable that you want to keep up a public image. But you know in your heart what the optimal amount of time to work is. If you are constantly crossing that threshold, it’s probably because you don’t have enough money.
5) If you keep boasting about your wins to get people to like you
Everybody wants to feel validated, especially from the people that matter most. However, it’s the seeking of validation from strangers that can make you unhappy.
If you are truly financially independent, you care much less about what other people think. Therefore, you find no need to publicly highlight most of your wins. Further, you won’t feel the need to roam in a herd to protect yourself from criticism either.
Once you have enough money, you also develop the courage to be disliked. It’s impossible for everybody to like you. But if you are OK with being disliked, it means you are doing things your way regardless of other people’s opinions.
6) If you still don’t feel ready to start a family
Having kids is a massive decision that nobody should take lightly. However, if you’ve achieved your financial independence number and still worry about how to afford raising kids and want kids, then you are probably not financially independent.
Retiring early without kids is a walk in the park in comparison to retiring early with kids. Rising healthcare and tuition costs are killers. You will probably also want a larger house, which usually comes with a higher price tag, maintenance bills, and property taxes.
Finally, you may develop the urge to give your kids everything, which may test your budget discipline. The Bank of Mom and Dad is a real thing because parents can’t stop supporting their kids, even after they are adults.
7) If you ask for financial assistance
This one should be obvious, but perhaps not!
When the pandemic started, someone told me a financial independence podcast started soliciting its Facebook community for donations. How you can claim to be financially independent while asking for money is beyond me.
Perhaps this is an example of cognitive dissonance? We like to tell ourselves we are more financially secure than we really are to feel more secure. But if every little downturn spooks you to the point where you’re asking people for money, you are not financially independent.
Your FI Number Must Generate A Livable Amount Of Income
You can argue all you want about the above scenarios. However, there’s no arguing with this one. Once you’ve achieve your perceived financial independence number, it should be able to generate enough passive income to pay for your desired living expenses.
Let’s say you have a $1,000,000 investment portfolio generating $30,000 a year. If you desire to live off $150,000 a year, then you are not financially independent. If you run the numbers, you will find out that withdrawing an extra $120,000 a year to pay for your desired lifestyle is unsustainable.
Sure, you could hope for 12% capital appreciation to make up the difference. However, you will most likely be disappointed in the long run. At the end of the day, your financial independence number should support you in a way that doesn’t keep you too worried about your finances.
The Courage To Act Is The Main Determinant Of FI
Until you have the courage to act, you must keep on saving and investing. Suboptimal situations won’t last forever. Eventually, you’ll accumulate enough money to be able to do what you want.
If you’re not yet financially independent, be open to the fact that your financial independence number might be wrong. It’s hard to know how will you feel until after you reach your number and are faced with the decision to act.
Further, if you’re still working at a day job, please consider the experience of those who no longer have a day job out of choice. They’ve made the biggest move while you have not tested your theory.
You’ll know your FI number is real when you finally do something to change your life for the better.
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