A lot of engineers in Silicon Valley participate in an anonymous discussion mobile app called Blind. It has become a very popular (and safe) place to discuss and compare information about workplace culture, total compensation, job offers, as well as financial related questions. I enjoy reading it but I make sure to take everything with a grain of salt. One of the topics was asking, “What is your Fire Number?”.
In this post, I will explain how to calculate your Fire Number and what the 4% rule is. I will also show you how to track your monthly spend as it compares to mine. Hopefully, we can get enough participation in the comments section to compare notes. Nothing else gives you a better perspective than eating a humble pie by comparing how big (or not so big) your Net Worth is when compared to others. Finally, I will reveal what my Fire Number is which you can use as a baseline to start your Financial Independence journey.
What is the 4% rule
The concept of a Fire Number starts with the magical 4% rule. When adding up all of your investments, hopefully you get an annual ROI of 4% or higher. Then the gereral idea is to make your total spend fit inside this 4% or higher ROI. Assuming an even conservative mix of stocks and bonds, the average ROI should be around 4% while never having to touch the principal. This is why dividend returns have become my favorite income stream investment. The Four Percent Rule was created using historical data on stock and bond returns over the 50-year period from 1926 to 1976. To make things easier, you can just invest in the S&P 500 index which has historically delivered annual returns of about 10%.
For example, if your total investment is $1,000,000 then you would withdraw $40,000 in your first year of retirement. Adjusting for inflation of 2%, the following year’s withdrawal would be $40,800, and so on for the next 30 years during retirement.
Monthly Spend
Understanding your monthly cash flow and tracking your spend is the next step in calculating your Fire Number. Tracking your monthly spend means deciphering your essential needs from your luxury wants. For example, Netflix account is not essential despite how much you want it. You will be just fine not watching the latest episode of Stranger Things.
However, electricity and internet expenses are essential. You need both if you want to work-from-home during a coronavirus pandemic or answer emails if you are out of work and applying for jobs.
Essential Need
- Rent / Mortgage
- Utilities (electric, gas, water)
- Internet
- Mobile phone
- Food
- Transportation
Luxury Wants
- Netflix subscription
- Gym membership
- Fancy Car (BMW, Mercedes, Tesla) — what’s wrong with a Honda or Ford car?
Total Monthly Spend
You can feel free to use my own monthly expenses as a baseline for adding up yours. Leaving out my rental expense details, my monthly expense total is $7,250. It breaks down into the following:
Fire Number Formula
Fire Number x 4% rule = Total Monthly Expenses x 12 months
My total expenses adds up to be $7,290.00 monthly or $87,480 annually. Using the above formula, my Fire Number would be $2,187,000.00. However, because I don’t believe in burning rent money and plan to pay off my home, my mortgage payment will disappear by the time I retire. After removing the mortgage payment, my Fire Number reduces to only $1,287,000.00. I know plenty of Software Engineers in Silicon Valley that have more than that in RSUs alone.
Quick Summary
The concept of a Fire Number starts with the magical 4% rule. The gereral idea is to make your total spend fit inside this 4% or higher ROI from your total investment principal. Below is the 3-step process guide to starting your Financial Independence journey:
- Step 1: Add up your Total Monthly Spend
- Step 2: Apply the Fire Number Formula
- Step 3: Analyze your expenses and adjust your lifestyle accordingly.
What is your Total Monthly Spend and Fire Number? Let me know in the comments.
