How to Count it #3 – Financial Independence ratio


La Palma, Canary Islands, 2015

I love sunsets on La Palma. Canary Islands are the which our family love. The slow pace of the live, great beaches and even better hike routes, excellent food and lot of cultural events. Our journey towards financial independence has started there. We spent there 3 weeks vacation and once we returned we said “ok, we want to partially live here”, so what we need to do for that?”

As I do have financial markets background, I created immediately our first balance sheet to get to the figures where we are. And it was around EUR 120.000 of net worth. Not bad for being 28 & 26 years old with already paid college/MBA loans, but ready for FIRE? Not at all.

So we slowly started to modify our habits into more frugal way. Not having 2 cars but just one, not upgrading our house so much (we could have afforded 200m2 house on 1000m2 land, but got rather half size one (100m2 on 500m2, but house could be reconstructed into 150m2 easily once our kids are older), we did not buy expensive clothes, haven’t started travel in more expensive way and so on. We simply said that we will try to maintain our costs level same or lower and we want to save enough to live several months/year on different locations around the globe. Especially on Canary Islands :).

Getting to costs base
Therefore, how to get to a figure which we need? I could calculate it in difficult or easy way and I decided to go for the easy one on historical data. We have still same mortgage and we pay over 90% of all stuff with our credit cards, so getting overall history is just couple of calculations. Here is the break-down:

  1. Housing
    1. Mortage – EUR 680
    2. Housing utilities – EUR 220
    3. Reserve for repairs – EUR 100
  2. Costs average in years:
    1. 2015 – EUR 1.300
    2. 2016 – EUR 1.500 (wedding and honeymoon…)
    3. 2017 – EUR 1.320
    4. 2018 – EUR 1.420
    5. 2019 – EUR 1.560 (to much things, will be less in second half of the year)

So the total for housing EUR 1.000 and the average for costs is EUR 1.420. So to consider that here and there I pay something in cash and sometimes we have some invoices not paid by credit card, I add-up reserve of EUR 380 to have nice rounded figure on EUR 2.800 per month.

And the revenue side
My ambition is not to come up with complicated calculations (like putting our house to airbnb once we are travelling for several month abroad once FIREd, considering lowering the mortgage by prolonging it once FIRED to only two-thirds of current payment etc.) and I decided to take simply 4% rule. So the calculation looks like:

  1. EUR 2.800 per month equals to EUR 33.600 per year
  2. EUR 33.600 divided by 4% equals to EUR 840.000
  3. EUR 840.000 can be held in either own house, investments or properties for short or long-term rentals.

This is our full financial independence ratio. We are currently at EUR 314.000, look at the chart below. I do also calculate the second ratio which is EUR 120.000 lower in needed revenue. That one estimate that we would simply move to our weekend house and we could rent our house where we do live. And it is one of the plans so I put this ratio down here as well.

Financial Independence ratios development since 2015

And where we are now? The more “Robust” ratio is by the end of 06/2019 on 37,4%, our “Weekend house” one is on 43,6%. Hope to hit 50% with this one by the end of the year!

And when can we fire? Here are deltas in years:

  1. 2015
    1. Robust: 3,3%
    2. Weekend house: 3,9%
  2. 2016
    1. Robust: 3,7%
    2. Weekend house: 4,3%
  3. 2017
    1. Robust: 5,3%
    2. Weekend house: 6,2%
  4. 2018
    1. Robust: 6,9%
    2. Weekend house: 8,1%

In 2019 we added so far 4,8% on Robust and 5,6% on Weekend house ratios. We are adding far way more assets to our wealth this year in order to accelerate the growth and it looks we might hit FIRE in couple of years. If we keep ratios gained in 2019 or slightly more conservative (9% for Robust and 11% for Weekend house), then we might retire:

  1. Living in weekend house by mid 2024, so in 5 years!
  2. Living in our current house by mid 2026, so in 7 year!

Sounds like a plan. What is yours? When do you plan to retire?

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Categories: how to count it

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