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Escape the rat race. Find your Freedom

April 21, 2024
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Finsesh
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Finsesh

Calculating your Financial Independence number and adjust for multiple sources of income.

Do you ever feel trapped in a never-ending cycle of commitments, expenses, and work? Do you feel smothered by the prospect of living out the rest of your days in the "rat race"? If so, you are not by yourself. Many people long for independence to live their lives as they choose, yet many feel bound by the limitations of their wealth. There is, however, a way out. You may escape the rat race and lead the life you genuinely want by estimating your financial independence number and actively working toward obtaining it through various sources of income. The idea of financial independence, how to determine your financial independence number, and techniques you might use are all covered in this article.


 

What is financial independence? 

Financial independence describes a situation in which a person or household has enough money or income-generating assets to meet their needs and pursue their goals without working a 9-5.

To build up enough assets to produce passive income streams, such as dividends and interest from investments, rental income, or passive income from a business. Financial independence frequently includes long-term saving and investing to achieve multiple sources of income. Once someone has become financially independent, they may be able to pursue their hobbies, take on passion projects, and make decisions about their lives without being bound by money matters.


 

How can I achieve financial independence

Financial independence can only be attained with thorough preparation, strict saving practices, and a long-term outlook. It is an objective that people of all income levels may work for and can be a crucial step on the road to obtaining both financial security and personal contentment.

The starting point to achieving financial independence is to calculate your financial independence number. Your financial independence number can be calculated by using the 4% rule. The 4% rule suggests that you can withdraw 4% of your investment in the first year of financial independence, and then adjust the amount annually for inflation, to make your savings last for at least 30 years. 

By combining multiple sources of income you can offset them against your financial independence number, to reduce the amount needed in your investment account according to the 4% rule. We will show an example below. 


 

How to calculate my Financial Independence number using the 4% rule

The 4% rule states that you can withdraw from your investment portfolio at a rate of 4% per year, and your capital should never deplete or at least last for 30 years. The initial study was done based on US rates and returns and would be very different in a country with higher interest rates. The founder of the 4% rule came out at the end of 2020 with a new and improved 4% rule and is now the 5% rule. The 5% rule means that your capital won't deplete or last at least 30 years at a 5% withdrawal rate. The fact remains that 4% is an excellent rate to start your calculations with and should be a guideline. The 4% rule has more cushion than the 5% rule. It's always better to have more than less when it comes to financial independence planning.

For these calculations, you would need to know your annual expenses. If you know it, please continue with the example. If you don't know your expense numbers, don't stress, as we will help you calculate your expenses by downloading this free budget tool.

The math for the 4% rule is pretty simple. You take your annual expenses and multiply them by 25. This is your fully financed financially independent investment number, the halfway mark is 12.5 times your yearly expenses.

Here is an example: (The 4% rule logic can be applied worldwide) 

You calculate your expenses, and it comes to R20 000 per month, which equates to R240 000 per year. This would be your annual expenses. These expenses of R240 000 multiplied by 25 equal R6 000 000. Using the 4% rule, we can see that R6 000 000 multiplied by 4% equals R240 000, which is your annual expense number. This is where the link is between the magic number 25, and the 4% rule.

This rule is only focused on an investment portfolio and drawing income from that portfolio once you reach financial independence. Your expenses can be funded from a variety of passive income sources, the three main passive income sources are:

1.  Property Investing

2.  Business income

3.  Stock market investments income

Continuing our example. As you can see in the image below taken from the FI Number tool we can see the R20 000 expenses required equals R6m needed in an investment account. This person has 2 properties earning R7000 net monthly and a passive side-line business earning R2000 per month. After inserting these amounts, this person only requires R11 000 per month funded from their investment account and using the 4% rule this is R3,3m which is a lot less than the initial R6m initially required. 

 

Summary: 

Financial independence can only be attained with thorough preparation, strict saving practices, and a long-term outlook. It is an objective that people of all income levels may work for and can be a crucial step on the road to obtaining both financial security and personal contentment.

 

If you want to find out more about becoming financially independent, please see our free course. If you want a blueprint toward financial independence, you can enrol in our Stages to financial independence course.

Onward to Financial Independence 

If you found this blog post helpful please follow us on Facebook and Twitter @finsesh for more tips on Financial independence and sign-up free to stay up to date on your journey to financial independence with our personal finance money blog


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