Calculating FI (financial independence) can sometimes seem like an exercise in smoke and mirrors. However, it can be rather simple.
You have to first figure out your monthly expenses. All luxury items are removed from that monthly figure. (Going out to eat, travel, etc). This is your “barebones” budget. Then you multiply your investments (majority in stock funds) by 0.05 (5 percent) divided by 12 months. (Rate of return). If the rate of return is greater than your barebone expenses – you have reached FI.
Some say a four percent rate of return is better, but it is agreed that 5 percent is more realistic from a 70+ percent stock fund such as VTI or VOO. Some say a barebones budget is unrealistic, but it is realistic when you are limited to income. Some opt for “Coast FI,” where they take a part-time job or minimum wage job while their investments are on autopilot. They cover their barebones budget with their wages and let their investment grow.
