How much do I need to invest to achieve financial independence?

I used to think that to be financially independent you needed at least seven-figure sums in your accounts.

As I dug deeper into investing, I was surprised to find that doesn’t have to be the case at all.

In the following lines I’ll walk you through a few steps that will help you calculate a target sum with the potential to generate long-term income and cover your living expenses (or part of them) without the need for active work.

ℹ️ For simplicity, let’s call this target sum the Financial Independence number, or FI number for short.

In a nutshell, when the value of your investments reaches your FI number, you’ve achieved financial independence.

There are multiple ways to calculate the FI number, multiple opinions, and multiple academic studies. Below I’ll share the calculation I trust and use myself.

The 4% Rule

In the international FIRE¹ community, the so-called 4% Rule is widely used. In simplified terms, it says that if we invest in stocks and bonds in a specific ratio, we can withdraw 4% of the total investment every year without the overall value decreasing over a long period.

That’s why the 4% Rule is sometimes also called the “Safe Withdrawal Rate” or SWR.

ℹ️ The 4% Rule comes from the Trinity Study (and its follow-ups).

I recommend the article The 4% Rule: The Easy Answer to “How Much Do I Need for Retirement?” by Mr. Money Mustache, which explains the concept in a very accessible way.

If we flip the 4% Rule around mathematically², we get the following practical formula:

FI number = 25 × annual expenses

The FI number is 25 times our annual expenses.

If we want an “even more practical” formula based on monthly expenses:

FI number = 300 × monthly expenses

Great, we know the formula. Let’s look at a concrete calculation.

The calculation

I first calculated my FI number back in 2016/2017, when my average expenses were fairly low: roughly €650/month (€7,800/year).

I applied the 4% Rule:

FI number = 25 × annual expenses FI number = 25 × €7,800 FI number = €195,000

As the calculation shows, to cover my annual expenses of €7,800 with passive income, I would need to have 25 times €7,800 invested — which comes to €195,000.

This might seem like a high and unreachable sum, but I hope to convince you otherwise through this blog.

What’s your FI number?

Using the formula above, we can look at more concrete examples.

If I want passive income to fully cover my phone bill of €8/month, I need €2,400 invested.

If I want all food expenses of €150/month covered, I’ll need €45,000.

For illustration, more examples in a table:

As you may have noticed, the formula also implies that the less we consume, the less we need to invest. With lower expenses, we reach financial independence sooner.

If we can reduce expenses while maintaining income, the saved portion can also be invested, which accelerates the whole process even further.

Target sum set. What next?

Our expenses change throughout life, so the calculated target sum / FI number also changes and fluctuates over time. The number you got isn’t set in stone, but it puts us in the picture.

Setting an investment goal — the sum we need to have invested — is just one of the first steps towards financial independence.

Next, we need to think about timing — when we’d like to achieve financial independence. We also need to determine how to reach the target sum. But that’s a topic for another time.

Additional notes on the 4% Rule

Even though investors around the world (including me) follow the 4% Rule, that doesn’t mean you have to. 🙂 Decide based on your own judgement.

I also think it’s important to clarify that the Trinity Study is based on a specifically chosen portfolio of stocks and bonds. This means that if your investment portfolio is different, you should naturally expect different results. The 4% value comes from specifically chosen portfolios — specific stock-to-bond ratios.

Your own portfolio may perform better or worse than the one in the study.

¹ FIRE — from “Financial Independence Retire Early” — is a community of people achieving financial independence in various ways, but primarily through a combination of investing in stocks, bonds, real estate, and their own businesses.

² The 4% Rule says we can withdraw 4% of the target sum (FI number) every year. 4% can also be written as 1 / 0.04 = 25.

Translated from the Slovak original.