by When I first started my journey toward financial independence, one question kept coming up: Which assets should I actually count? While tracking net worth is straightforward, calculating your financial independence (FI) number requires a more nuanced approach. Let me share what I’ve learned through personal experience and help you avoid common pitfalls.
Understanding the Difference: Net Worth vs. FI Number
Your net worth calculation is simple: Assets minus Liabilities. Everything you own and owe gets included. But your financial independence number? That’s where things get interesting.
The key principle is this: Unless an asset generates income or can be converted to income-producing investments, it shouldn’t count toward your FI calculations. Let’s break down how to determine your target.
Calculating Your FI Target: The 4% Rule
To find your financial independence number, start with the 4% rule: multiply your anticipated annual expenses by 25. For instance, if you plan to spend $45,000 yearly in retirement, you’d need $1,125,000 in your investment portfolio.
But here’s where it gets more practical. If you have other income sources, like rental properties, use this modified formula:
FI Number = (Annual Spending – Other Annual Income) x 25
Real Estate in Your FI Calculations
Primary Residence
Should your home count? It depends on your strategy:
- Planning to sell and invest the proceeds? Include about 85% of your equity (accounting for selling costs)
- Staying put? Don’t include it in your FI number, but consider a HELOC as part of your retirement toolkit
Rental Properties
In our case, rental income became a crucial part of our FI strategy. Our property generated $1,000 monthly in net profit, covering our entire mortgage. This reduced our annual portfolio withdrawal needs by $12,000 – and the best part? Rental income typically keeps pace with inflation.
Personal Assets Like Vehicles
While your car is part of your net worth, it shouldn’t factor into your FI calculations unless you plan to sell it and invest the proceeds. Instead, build future vehicle replacement costs into your annual budget or maintain a separate fund for this purpose.
Our Personal Journey to Financial Independence
We reached our FI number in 2017 but chose to work two more years until our first child was born. This flexibility proved invaluable when unexpected medical decisions arose–having financial independence meant maintaining complete autonomy over our healthcare choices.
Beyond the Numbers
Financial independence isn’t just about hitting a target number; it’s about creating options. For us, it meant the freedom to prioritize our family’s needs without employment constraints. While tracking your progress is important (we found monthly check-ins worked best), remember that life isn’t a spreadsheet. Stay flexible and adjust your plan as circumstances change.
Final Thoughts
Financial independence is more than reaching a magic number–it’s about creating the freedom to live life on your own terms. Our journey taught us that while calculations and spreadsheets are important tools, they’re just that–tools. The real value lies in the options FI creates, whether that’s spending more time with family, pursuing passion projects, or having the autonomy to make important life decisions without financial pressure.
We took a conservative approach, working two years beyond reaching our FI number. That buffer gave us peace of mind and ultimately proved invaluable when faced with unexpected medical decisions. Everyone’s path to financial independence will look different, and that’s exactly how it should be. The key is finding the approach that aligns with your values and goals.
Another wonderful written article!
Gracias! This was a question from a blog reader, and I felt it was better to address it in a post. As the blog grows, I hope to continue assisting others who are just learning about financial independence, so I’m glad that many people find it useful. Thanks for commenting. The feedback is really helpful as well.