Paridhi Kothari, Sangeet Chandaliya
Let's talk about the quantitative aspect of our FI journey.
FI-number
One of the most important steps is to calculate the FI number. FI number is the amount of money we need to have invested such that the inflation-adjusted return on our investment exceeds our expenses. Once we reach this number, we no longer need to work. Instead, we can let our money work for us!
We needed two sets of information to calculate our FI number:
- What are the expected annual post-FI expenses, based on the kind of lifestyle we want to have?
- What is the expected average rate of return on our investments?
Estimate of our Expenses post-FI
- When do we plan on concluding our FI journey? For us, this age is 35.
- How much will we spend in today’s money if we live the lifestyle we want to have post-FI? This includes expenses towards both our needs and our wants. (Check out our wants
What makes us happy?) For us, this figure came to around INR 15L per year at present. - What is the inflation rate? For us, this is 5%, because we plan on investing and living in India (or, a similar country) post-FI.
Combined together, at 35, the estimated expenses of our lifestyle will cost us INR 25L ~= 15L*(1+5%)^10 years.
Average Rate of Return
We invest most of our savings in mutual funds (and individual stocks). Therefore, we expect an average rate of return of 15% per annum (based on the Indian market). This is based on the fact that NIFTY and SENSEX have given ~15% return when averaged over 20 years.
Inflation-adjusted rate of return is 10% per annum (15% average rate of return - 5% inflation rate)
Calculating the FI-number
If we spend INR 25L every year post-FI, we would need to have invested INR 25L / 10% = INR 2.5Cr by the time we reach 35.
We are not done yet! INR 2.5 Cr is not a fool-proof number (nor is it our FI number). In life, there are a number of uncertainties, unknown knows, and unknown unknowns. The FI community advises (and we agree) that we should add a significant buffer, to account for these uncertainties.
We arrived at two estimates of our FI number: 3.5 Cr (40% buffer) and 4.5 Cr (80% buffer). Our buffer primarily includes dependent-related expenses, emergency medical expenses, and vehicle-related expenses.
Monthly Contribution
To reach our FI number, we need to invest regularly. But exactly how much should our monthly contributions be to arrive at our FI number by 35?
We used Investor.gov's Savings Goal Calculator to estimate that we need to save between 1.2-1.6L per month to reach our goal. Both of us were pleasantly surprised by this figure, because this number seems very much achievable, especially in a scenario where both of us are working.