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This usually revolves around net worth, and many of us ahem have a specific net worth goal they want to achieve. Various formulas and calculators abound.
The popular book The Millionaire Next Door suggests this formula for a target net worth : In addition, there are various debates on how to measure net worth. Do you include your primary residence, or not? What about cars or jewelry? How do trading binars on weekends properly account for pre-tax accounts?
However, while reading this post at Early Retirement Extreme amongst others I realized that these are not the things I need to be focused upon. Your expenses do. It may be assumed that the two are related, but that is not necessarily true.
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We all have the power to disconnect the two. This also calls into focus how important spending patterns are when talking about financial freedom.
Sure, it can be very difficult to keep slashing expenses, but this ratio keeps you honest as to how close you are to financial independence. To find this, I went to the Vanguard Annuity website and looked up a price quote for their inflation-adjusted fixed immediate annuity Lifetime income option, fixed payment, bottom right. This means that, if I give Vanguard a lump sum of money, they will give me a regular income that is adjusted every year for inflation per the CPI-U.
Annuities are subject to the claims-paying ability of the issuing insurance company, which is AIG Insurance.
So a lifetime of my required income requires an FFR of As you get older, the number decreases. I need to fix this.
This year, it will be much higher due to housing expenses, although one day the house financial independence ratio balance formula be paid off.
My FFR is certainly less than 10 right now, more like in the 8 range. In addition, it reminds me that our expenses matter equally as much as our net worth.
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Do you know how much you spent last year? I am convinced that spending is a habit. If you spend modestly now, it will be easy to maintain this in the future.
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If you spend lavishly now, it will be very difficult to downgrade later on. We all have our luxuries which we hold dear, I know I certainly do, but it has to be weighed against how long you want to keep working and saving.
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So, after all this I suppose I need to figure out how to gradually shift to a simpler and less costly lifestyle. Heck, forget cutting expenses, I spend a lot of effort simply trying not to accumulate more expenses these days… Share this:.