Financial Independence Score
Calculate Your Financial Independence Score (FIS)
In the journey towards financial freedom, knowledge is not just power—it’s the roadmap. One crucial tool in this quest is the Financial Independence Score (FIS), a simple yet profound formula that offers a clear snapshot of where you stand on the path to financial independence. The formula is:
\[ \text{Financial Independence Score} = \left( \frac{\text{Your Net Worth}}{\text{Annual Expenses} \times 25} \right) \]At its core, the FIS quantifies how close you are to achieving financial independence, a state where working for money becomes a choice rather than a necessity. Here’s how it works:
- Net Worth: This is the total value of what you own—both financial assets like savings, investments, and retirement accounts, and non-financial assets such as real estate—minus what you owe.
- Annual Expenses: The yearly total of what it costs to live your life. Knowing this number is crucial, as it defines the lifestyle you’re aiming to sustain without the need for active income.
By dividing your net worth by your annual expenses multiplied by 25, the FIS provides a ratio that measures the durability of your financial resources against your lifestyle needs. A score of 1 or greater suggests you’ve reached financial independence: your assets can support your current living expenses indefinitely.
Why multiply by 25?
This factor is rooted in the 4% rule, a guideline suggesting you can safely withdraw 4% of your retirement savings annually without depleting your principal over time. Multiplying your annual expenses by 25 gives you the nest egg needed to support your lifestyle indefinitely, assuming a 4% withdrawal rate.
A Financial Independence Score suggests that you have reached financial independence, meaning your net worth could theoretically support your current lifestyle indefinitely, assuming a 4% safe withdrawal rate.
Understanding your FIS is more than a number-crunching exercise; it’s a reflection on your financial health and a guide for future planning. Whether you’re just starting out, reassessing your goals, or nearing your target, your FIS serves as a beacon, illuminating the path towards financial independence. With this knowledge, you’re equipped to make informed decisions, adjust your strategies, and take proactive steps towards a financially free future. It’s not just about reaching a destination but enjoying the journey, knowing each step takes you closer to the ultimate goal: financial independence.
Understanding Your Score
Your Financial Independence Score (FIS) isn’t just a number—it’s a snapshot of your financial freedom journey. Here’s what it tells you:
- Below 1: You’re on your way but need to grow your net worth or reduce expenses to achieve financial independence.
- 1 or Above: Congratulations! You’ve reached financial independence. Your net worth can theoretically support your lifestyle.
Relation between inflation and Financial Independence Score
Think of inflation like a sneaky tax on everything you buy, slowly increasing prices over time. When planning for financial independence, it’s important to remember that the money you save today won’t buy as much in the future.
That’s where the 4% rule comes into play. It’s not just about withdrawing 4% of your savings each year; it’s also about increasing this amount a little each year to keep up with rising costs.
Imagine you start by taking $40 from a $1,000 savings pot. If things get 3% more expensive next year, you’ll need to take $41.20 to buy the same stuff. The 4% rule helps make sure you can do this for 20 years or more, keeping your lifestyle steady even as prices go up.
Want to know your FIS?
Use Finiscus. It’s easy and can show you how your savings stack up against your lifestyle. Let’s make financial freedom a goal, not just a dream. Check out Finiscus and start planning for a future where you’re in control.