When calculating your annual expenses to determine your Financial Independence Number (FIN), you should not include your monthly savings and investment amounts. The FIN is meant to cover your living expenses, not the amounts you are setting aside for future investments or savings. Here’s a breakdown of what to include and exclude:
What to Include in Annual Expenses:
- Housing: Rent, mortgage payments, property taxes, homeowner’s insurance, and maintenance.
- Utilities: Electricity, water, gas, internet, and other home utilities.
- Groceries: All food and household supplies.
- Transportation: Car payments, insurance, fuel, maintenance, public transportation costs.
- Insurance: Health, dental, vision, and any other personal insurance premiums.
- Healthcare: Out-of-pocket medical expenses, prescriptions, and co-pays.
- Debt Payments: Minimum payments on credit cards, student loans, and other debts.
- Entertainment and Dining Out: Restaurants, movies, subscriptions, and other leisure activities.
- Miscellaneous: Clothing, gifts, personal care, and any other recurring expenses.
What to Exclude:
- Savings: Monthly contributions to savings accounts.
- Investments: Contributions to retirement accounts (e.g., 401(k), IRA), stock investments, and other investment vehicles.
- Large One-Time Purchases: Big-ticket items that are not regular occurrences (e.g., buying a new car, expensive vacations).
Calculating the Financial Independence Number:
- Determine Annual Expenses: Sum up all your monthly expenses and multiply by 12 to get the annual amount.
- Use the 25x Rule: Multiply your annual expenses by 25. This rule is based on the 4% safe withdrawal rate from the Trinity Study, which suggests that having 25 times your annual expenses invested can allow you to withdraw 4% per year indefinitely.
Example:
- Monthly Expenses: 30,000 SEK
- Annual Expenses: 30,000 SEK x 12 = 360,000 SEK
- Financial Independence Number: 360,000 SEK x 25 = 9,000,000 SEK
This method ensures that you have enough saved to cover your living expenses without running out of money, assuming a conservative withdrawal rate and a diversified investment portfolio.