1. Determine Your Target Annual Expenses
Calculate your current annual living expenses. This should include all necessary expenses such as:
- Housing (rent/mortgage)
- Utilities and bills
- Grocery and food expenses
- Transportation
- Healthcare
- Entertainment and leisure
- Travel
- Miscellaneous expenses
2. Calculate Your FIRE Number
Your FIRE number is the amount of money you need to have invested to retire early. A common rule of thumb is the 25x rule, which suggests you need 25 times your annual expenses invested. This is based on the idea that if you withdraw 4% of your investment annually, your savings should last you indefinitely.
FIRE Number Formula:
[ \text{FIRE Number} = \text{Annual Expenses} \times 25 ]
3. Estimate Your Current Savings and Investments
List all your current savings and investments, including:
- Bank savings
- Fixed deposits
- Mutual funds
- Stocks
- PPF/NPS or other retirement accounts
4. Calculate Annual Savings Rate
Determine how much you can save annually from your income after expenses. This figure reflects your commitment to the FIRE lifestyle.
Annual Savings Formula:
[ \text{Annual Savings} = \text{Income} – \text{Annual Expenses} ]
5. Project Future Savings and Investment Growth
Use a compound interest formula to project how your savings will grow over time. The future value of your investments can be estimated using the formula:
Future Value Formula:
[ FV = P \times (1 + r)^n ]
Where:
- ( FV ) = Future Value
- ( P ) = Principal amount (initial investment)
- ( r ) = Annual interest rate (as a decimal)
- ( n ) = Number of years
6. Consider Inflation
Consider an estimated inflation rate (often around 6-8% in India) when calculating your future expenses and returns to understand their impact.
Sample Calculation Example
Let’s assume you have the following values:
- Current Annual Expenses: ₹10,00,000
- Current Savings: ₹30,00,000
- Annual Savings: ₹5,00,000
- Expected Investment Return: 8%
- Target Inflation Rate: 6%
- Years to FIRE: 15
- Calculate FIRE Number:
[ 10,00,000 \times 25 = ₹2,50,00,000 ] - Project Savings Over 15 Years (Using Compound Interest):
You would calculate the future value of your savings and contributions over 15 years with an 8% return using the future value formulas. - Evaluate if You Reach Your Fire Number:
If your projected savings exceed ₹2,50,00,000 by the end of 15 years after accounting for inflation, you are on track for FIRE.
Creating a Simple Spreadsheet
You can create a simple spreadsheet to input these values and perform the necessary calculations. Include options to adjust annual expenses, savings rates, investment returns, and timeframes for a personalized calculation.
Tools and Apps
There are also several online tools and apps globally that cater to FIRE calculations. While they may not be India-specific, they can still serve as a reference. Some popular ones include:
- FIRECalc
- Networthify
- Smartasset’s retirement calculator
These tools require you to input your own financial data, which can help streamline the process and offer visual insights into your savings journey.
Disclaimer
Keep in mind that personal finance is highly individual. It’s advisable to consult with a financial advisor to tailor the plan to your specific circumstances and adjust to changing financial situations and goals.
