Long- term financial independence ratio calculation. Financial independence calculator and what to consider (with case study)


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  8. Financial Independence & FIRE Calculator • | by I Am Net Worthy

How close are you to financial independence? What if I tell you that you can calculate this number down to a reasonably precise percentage.

The 3 Keys to Financial Independence

Regardless of where you stand financially, knowing where you are is a great way to help you move closer toward your goal of financial independence. Like measuring distance or time, knowing where you are currently helps make a long journey more bearable.

What Is FIRE?

Second, to smooth out the fluctuations, it is best to measure the average passive income and expenses over the past 12 months when you do your calculation. What is Considered a Passive Income? But remember that you do not have access to this until you reach the minimum age of Pension Benefits Other Passive Income — In another article, we have identified 21 ways to generate passive income.

  • But what does financial independence really mean?
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  • Once you reach Financial Independence, you no longer need to work for a living.

Any money you make passively counts toward your passive income. The most common sources are rental properties and investment income.

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A Note About Early Retirement For those that are considering early retirement, remember that you have to plan your financial independence in two stages.

The first stage is before you have access to your retirement savings, pension benefits, and social security benefits.

Why Everyone Pursuing Financial Independence Needs Solid Financial Education

The second stage comes into play when those income sources become accessible without penalty. This means that if you want to retire earlyyou have to depend on investments in your taxable accounts and other passive income sources.

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Scenario 1 Jane is 25 years old. She has no other passive income. What is Your FI Ratio?

All Three Levels Of Financial Independence Are Good

Did you try to calculate your FI Ratio? Cut Your Expenses As you can see above, your expenses is a major variable. Each dollar you save helps you achieve financial independence faster! Pay Off Your Debt When you pay off your debt, you achieve two things simultaneously. First, you reduce your expenses by the same amount as your debt payments.

Such a division is characterized by the level of debt recovery from own assets The financial independence ratio appears to be one of the most important financial and economic indicators and is carefully used when studying the financial and economic activities of an enterprise. The financial independence ratio is an indicator that characterizes the share of equity in the total number of assets of the organization. The essence of the financial independence ratio is to show what part of the assets is secured by its own funds, and what part is attracted through credit institutions.

Second, you have more money to pay toward other debts, i. Invest More Money Another important variable is your investment portfolio. As you invest more money, you also need to invest for the best returns according to your time horizon and risk tolerance level.

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Build Passive Income Streams Last but not least, and perhaps the hardest thing to do out of these four ideas, is to build passive income streams. Some of the most reliable ways to generate passive income include: Investing in income-generating investments.

The Three Levels Of Financial Independence

These investments include dividend investing and investing in bonds and REITs. However, you have to be long- term financial independence ratio calculation because growth investing is a much better option for younger investors.

  • Learning the main concepts and using the calculator will help you create a specific plan, so your path to early retirement can be shorter.
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  • Your income will usually also increase during this period.

As you grow older and your risk tolerance level decreases, income investing becomes a safer and more desirable option. Rental properties.

Financial Independence Ratio (FI Ratio)

This is a proven income-generating investment. Rental properties can add a significant amount of cash flow once the mortgages are paid off.

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When you get tired of managing the properties, you could hire a property manager or sell your properties and reinvest the money in other income-generating investments.