If you haven’t set yourself any personal finance goals, you should. It is really motivating to be working towards a specific financial future.
Just remember goals should be measurable. For instance, Mrs. Dragon and I want $600,000 and a paid off house by February 2025.
That sounds like a lot of money. Actually, it IS a lot of money. After you calculate how much money you think you will need, it can be pretty daunting trying to get there. I mean, $600,000!?! After looking at our current net worth, that seems a pretty far ways off. If you’re new to the personal finance game, it can seem downright undoable.
Luckily, dear reader, there’s a different way to frame this number:
How much do I need to save every month to hit my goals?
Thinking about “your number” in terms of a monthly amount can make it seem much more reasonable. Here’s how to calculate your monthly number.
How many months away is your proposed FIRE date? For me and Mrs. Dragon it’s 117 months.
Next, you need to know how far away you are from your goals in terms of dollars. In our case, for now, lets ignore the paid-off house and focus on hitting the 600k in liquid assets. This month The Hoard was worth $55,500 (roughly). That leaves us $600,000 – $55,500 = $544,500 short of the mark.
Now just divide the amount of money you still need by the number of months until your FIRE date. For us, $544,500 / 117 = $4653.85 per month. I don’t know about you, but looking at the monthly number seems much more attainable than looking at the end goal.
Of course, the purpose of this exercise is to give you a rough idea. It’s not an exact science. For one thing, this assumes that your money isn’t invested. In actuality, over the course of 117 months we will very likely have some investment returns (most ~10 year periods do), and this calculation doesn’t take that into account. It also assumes that you are planning your number in “future dollars.” In other words, the dollar amount you are using as your number takes inflation into account.
Breaking the big number into these much smaller increments can really help you realize whether or not your goals are achievable. For instance, if you do this calculation and find out that you are supposed to be saving $10,000/month, but you can only afford to save $2000/month, you might need to adjust your expectations.
Whether or not you can personally save $4653.85/month isn’t important. You should do these calculations using your own numbers and FIRE date. You might find that you are better off than you thought, or that you need to adjust your expectations. Either way, we aren’t ostriches. If you are interested in personal finance you should want the numbers, good or bad, so that you can adjust your plans appropriately.
For those who are interested, the same type of calculation says that Mrs. Dragon and I also need to be paying $835.47/month in principal on the mortgage every month to meet the paid-off house goal. That’s a total of $4653.85 + $835.47 = $5489.32/month, or $65,871.84/year we need to save to meet our goals. Very tough but doable for us.
Now let’s look at these same calculations from a different angle. Maybe you know how much you can save every month and how much you need to be financially independent, but you don’t know when you can call it quits. The same math applies.
Assume you know you can save $2500/month and that you need $750,000 to be financially independent. However, you’ve been working hard for the past year or so and have $25,000 saved up already. This would leave a deficit of $750,000 – $25,000 = $725,000 that you still need to save.
Since you can save $2500 every month, we divide $725,000 / $2500 = 290 months away from FI. So, your FI date is a little more than 24 years away.
If you can bump up your monthly savings to $3500/month, you are $725,000 / $3500 = 207 months away, or about 17 years and 3 months.
However, this model really doesn’t do that great a job of estimating the timeline for periods longer than about a decade. As we discussed above, we are assuming no return on assets in these calculations.
The take away here is that you can get a conservative, quick-and-dirty, back-of-the-envelope calculation using this method, but if you are more than a decade away from financial independence, you should probably use something more sophisticated like the Mad FIentist’s FI tracker (you have to sign up, but it’s free and a good resource).
Just remember, no matter how you slice it, reaching financial independence is a huge goal that is going to take some time. It’s a marathon, not a sprint. Looking at your numbers in terms of a monthly amount, rather than a total amount, can help keep you motivated when the going gets tough. But you can do it. The Dragon has faith in you. Just remember…