304 | Mapping Out Your FI Number | ChooseFI podcast - Listen or read transcript on Metacast

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Episode description

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Episode description

Jonathan checks back in with Corinne from the Households of FI series to look at her numbers, goals, and map out a FI plan.

Financial independence is not about having the most money. In the pursuit of FI, the math is simple, but the math will change depending on your goals. It’s important to start with understanding what you want your ideal day to look like.

Following Corinne’s last coaching session with Jillian, she learned how to build good habits and strategies to get closer to the goals she wants.

One of the strategies she’s using is her phone to set reminders for the goals she wants to achieve. The reminders hold her accountable without her having to remember everything.

Jonathan pointed out one of the great pieces of advice from the episode with Jillian was her advice to explore the goals you find yourself resisting giving even two minutes to. What is it in your subconscious that is sabotaging your goals?

Corinne is on track to become a partner at her firm but that comes with a lot of expectations. In an exercise with Jillian, she was asked to write down what her ideal day would look like. to start, she’s been writing down which activities are energizing and which are draining. It has helped her to manufacture her day to be the kind of day that makes her want to get up and go to work in the morning.

She discovering that she doesn’t have to work as many hours as everyone one else. She can balance it out, earning a little less money while being happier.

We can make time to make each week more memorable and enjoyable when we spend less time on meanless activities.

When you take what earn and subtract what you spend, what you are left with is the gap. When you live paycheck to paycheck, there is no gap.

Corinne earns $120,000 a year as an accountant. She was in a five-year program where she got her Bachelor’s and Master’s degree that gave her enough requirements to take the CPA exam. Due to a scholarship, she graduated without any student loan debt.

A similar recent graduate starting out now would make around $50,000 a year. She was able to double her salary and excel by narrowing her focus and becoming an expert in that space.

In her industry, there are clearly defined roles with specific salary ranges. Increasing income requires the desire to progress and take on more responsibility. Becoming a partner wasn’t always on her radar, but she liked the idea of having ownership in the business.

Corinne hasn’t researched the details of the retirement payout for partners at her firm, but there is some form of payout in retirement. Since she is on the trajectory to becoming partner, being able to project the retirement payout will help to calculate her FI number.

One of Jonathan’s favorite income tax calculators is at Smartasset.com because it will incorporate state and local taxes. Using Corinne’s salary, he calculates her federal tax plus FICA and Social Security is $29,227. Since she maxes out her 401K, it reduces her tax to $23,000 and saves her more than $6,000 in income tax. The income she brings home is then $77,445, or around $6,500 per month.

Now looking at Corinne’s expenses, her mortgage is approximately $1,000 and she spends $500-550 a month on food. She does not have a car payment but between gas and other expenses, it’s around $100 a month. Utilities run $400 per month. Additional budget categories include dining out and shopping for $500, charitable giving at $200, housekeeping is $100, and her HOA bill is $150. Though travel is on hold at the moment, she’s like to budget $250 a month for vacations. And finally, an additional $200 was included to cover odds and ends.

Corinne’s total monthly cost-of-living is $3,375. To find out her gap, Jonathan takes her net monthly pay of $6,500 and subtracts her monthly expenses of $3,375 to calculate a gap of $3,125 each month.

Jonathan suggests putting the gap to work for her as quickly as possible and sending it to her investment strategy. Before doing this exercise, Corinne had no idea what her gap was and grabbed a random number to move to savings.

To start working on a plan for financial independence, Jonathan uses net worth and age. Corrine’s 401K balance is about $150K and her taxable account has another $100K making her invested net worth $250,000. She is 32 years old.

Using ChooseFI’s simple Retirement Projection calculator, Jonathan plugged in Corinne’s numbers. Her FI number is $1,012,500.

Next, Jonathan uses ChooseFI’s Future Value of Investments calculator to project how many years it will take Corinne to reach her FI number through both the growth of her current invested balance and her monthly contributions. Using an 8% rate of return, in 10 years Corinne will have $1.4 million far exceeding her FI number. Sometime between 7 and 8 years is when she will reach financial independence.

The exercise is energizing for Corinne who previously thought she would need to eat rice and beans to reach financial independence in 10 years. She was nervous to see the numbers but now finds it motivating. Her next step will be to ensure she’s taking that extra money every month and putting it to work for her.

Once you’ve got what you earn, what you spend, identify the gap, and decide what you’re going to do with the gap, you’ve got your FI plan in place.

Resources Mentioned In Today’s Conversation

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