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 alone. Many people yearn for freedom to live their lives as they please, but many also feel constrained by the restrictions 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 towards 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 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. When a person is financially independent, they may be free to pursue their interests, take on passion projects, and make life decisions without worrying about money.

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. You can use the 4% rule to calculate your level of financial independence. 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, which is now the 5% rule. The 5% rule means that your capital won't deplete or last for 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 expense. R6 000 000 is the result of multiplying these expenses by 25. Using the 4% rule, we can see that R6 000 000 times 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, the R20 000 expenses required equal R6 million needed in an investment account. This person has two 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 R3,3 million, which is a lot less than the initial R6 million 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.

At Finsights, we want you, the everyday hero, to take control of your finances, become aware of financial independence, grow your knowledge, and let us be your financial independence partner. 

Onward to Financial Independence