Early independence calculator and the costly mistake of your networth

financial independence

Ok ok ok… I start off but saying that I have done some mistakes with calculations, nobody’s perfect right! And we all learn along the way.

So… Everyone agrees that you become financially independent when therevenues from your passive investments (as opposed to active, ie working for a company) equals at minimum to your monthly spending. Simple calculation right?
Not so as people tend to ask few relevant questions: Passive investments, would you count your superannuation? What about your safety net? How do you factor inflation and taxes? And i also all depends how you calculate your Net worth.

I’ll be straight: There is no-one that can predict future of inflation, market and real estate returns, etc.. At best, we guess so don’t take any calculator you find on the web for granted.
Here is how I got wrong: For a long time, I use to count my home in my net worth calculation and my safety spend

For those who don’t know, safety spend is money that you keep in case of emergencies. It is recommended to have at least 3 to 6 months worth of expenses in cash, just in case. Like insurance, you may never need it, but if you do, you will be able to concentrate on the emergency it self and not another financial pressure on top of that. Basically not as immature as I was young: http://www.quest2independence.com/finance-australia/my-story/

Back to net worth: If you count your home unrealized equity in your house, as I did, I don’t think you’re in the right. I know some people say that you can sell, you can access to reverse mortgages, etc… But, again, that’s a big bet ! What if the mortgage industry is being regulated and you cannot access the equity anymore? You could sell… But you will have to live somewhere else and unless you’re willing to downside, you might lose more money than you gained (taxes to sell AND to buy again!)

So here is the way I track my years until financial independence:

1/ Getting to know your spending levels:

To do this, I use Pocketbook: https://getpocketbook.com/signin
One free tool that links your account details to preset expenses and categorize them for you. So, in 9 months, a year from now, you can exactly know how you spend, not making assumptions as other calculators do..
On my side, I modified manually some expenditures like kids day care.
Also, you can track your expenses but not your revenue. In case of real estate, I use my tax returns to know exactly how much I’m making or losing per year

2/ Calculating your net worth:

Many tools I have used along the way but one simple is coming from Moneysmart: https://www.moneysmart.gov.au/tools-and-resources/calculators-and-apps/your-net-worth-calculator

Again, count only what brings you revenue, not your car, bicycles and tools… 🙂

I take into account my superannuation.

One word on real estate. As we all know, real estate (RE) in Australia is very rarely making monthly revenue returns in the beginning. As such, I suggest not to invest in RE if you’re planning to retire in 5 years: Your investment is likely to cost you monthly than bringing monthly. Unless you buy to resell or buy in region (Big bet BTW!).
To get an idea of my long term returns on RE, I use the calculator below:
Again, there are assumptions but might give you a fair idea of LONG TERM returns. I insist, RE will help you in case you’re investing there in the long haul.

3/ Annual savings

I track these monthly and make an average. I have done my own excel file. Contact me if you want to have a copy.
This is an important step as this is the money your going to invest yearly until you plan to retire.

4/ Calculate your early independence date

That’s the exciting part and I use two calculators to cross check.
The first one is https://lab.madfientist.com/sign_upPretty much straight forward, enter your net worth from above, your monthly spending and saving… and voila!

The other one… I LOVE !:
Why? Because it gives you many possibilities: Add your superannuation repayments when you turn 60 (and this date is also your choice!), taxes, inflation rates assumptions, rate of returns of your investments.
You can see straight away your impact of your yearly spending on the feasibility to retire of not

See y’all!

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