Project FIRE 40 – Calculating my Financial Independence number (and target Gateways to get there)

Calculating my magic number

My number, that magical number that means I have enough to retire. The magic number itself is a myth, there is no specific number. There are too many future factors and variables to calculate a number with accuracy.

Two of the biggest variables are inflation or the risk of a market collapse.

I prefer to think about it as like packing clothes for a long trip. There is no way to know exactly what is going to be needed, but I can get a good idea, based on expectations, what has happened in the past and importantly, I can adjust.

The maths to calculate what is needed is probably simpler than you envisage.

The Shockingly Simple Math Behind Early Retirement

From the man who has become the godfather of the FIRE community – Mr. Money Mustache – He wasn’t the first, he probably isn’t even the best, but almost everyone in the FIRE community has been influenced by him.

According to his maths, to reach my PF40 target, I need to save 85% of my earnings. I cannot do this (at the moment, I can save/invest/pay debt about 40-60%, if I am aggressive). I need to go beyond paper (investments) and use more risky investments (targeting a higher return, after all, I have time to recover, so can carry the risk), then perhaps Property and/or Business, but more on that in steps 6 and 7.

My Simple Target Number:

  • (Monthly Expenses / 4% ) * 12 months = My Magic Number 

4% is the reasonable assumption to work out the amount of paper based assets I need to live off. It cannot be robotic though. If I cut back a little in bad times, it should be fine.

It is interesting to see how a relatively small reduction in expenses can have such a big impact on my number (See Spartan Rule of 300).

Another way to look at it is:

  • X Assets producing my monthly expenses

The second way, will typically mean a lower level of assets. The assets need to be relatively robust. Potentially something like property, which is typically more inflation aligned and with a decent sized portfolio relatively stable. BUT, tenants can be draining. The type of property is also important. Again more on this later in the next steps.

Going the income generating route (other than perhaps rent) can be problematic over the long term, as markets can change, particularly in the emerging niches, which I will target to achieve higher returns.

Lowering my target number by a third

Of course,  on the other hand, I know that I’ll likely continue to earn money, perhaps at a lower rate.

I can also be completely location independent, meaning that I can leverage geographical arbitrage.

So, given I could live cheaper, use income generating assets (requiring some management) which get a higher return; and I’m likely to earn more money. I think I can take 33% off “my number”.

So now, I have a target number in my mind, which given known factors means that I can consider myself financially independent.

Gateways to FIRE 40

Simply going for one target number is too overwhelming and likely to be disheartening along the way, both leading to a lack of focus. Instead I have identified gateways, as I achieve these, I will move closer to my goal. 

The first is getting out of debt, at the moment I have a couple of 0% interest credit cards and a couple of cyclical credit cards which I pay off each month. I want to stop using them or at least be able to pay them ahead of pay-day.

The second is enough money so I don’t live from pay cheque to pay cheque, this allows me security to take the risks I need to take. The third is similar, but instead of money, it is experience and pension pot, again allowing me to take risks and leverage my time, money and experience.

The fourth is asset accumulation towards my target number.

 

Gateway 1 – Out of Unsecured Debt – Aug ’19

  • Pay down Zopa Loan - Feb '19
  • Close Amex - Apr '19
  • Get out of cyclical (1 month behind) Lloyds - May '19
  • Pay down Lloyds 0% Credit Card - Used when buying my flat - Jun '19
  • Pay down MBNA 0% Credit Card - Used to buy car - Aug '19

Gateway 2 – FU Money – Gives leverage to be in a stronger position with employer and security to take Risks – Oct ’19

  • 1 Month of Expenses - Jun '19
  • 3 Month of Expenses - Jul '19
  • 6 months expenses - October '19

Gateway 3 – FU Security – Allows additional risks to be taken – Jan ’19 – COMPLETE

Gateway 4 – FIRE 40 – Feb ’23

  • 20% - Dec '20
  • 45% - Dec '21
  • 80% - Dec '22
  • 100% - 1/4% of expenses = Financial independence Feb '23​​​​​​​​

For those wanting to join me on the journey:

Step 1 – Foundation– Working out my why and checking my understanding –full immersion listen to FI and learn then stop. From now onwards only Just In Time learning.

Step 2 – Set principles – principles allow better decisions to be made, as they have a reference to evaluate criteria against

Step 3 – Working out my Baseline– Knowing where I am now

Step 4 –Reduce and optimise expenses with Budgeting – Key to FIRE is avoiding and reversing the second application of Parkinson’s law.

Step 5 – Calculating my Number & Setting Gateways – To allow focus and direction

Step 6 – Enhance Income routes – Allowing for financial leverage

Step 7 – Invest Strategically – Allowing for wealth accumulation

This experiment both excites and intrigues me, both the journey and the potential outcome.

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