What is my 'financial independence factor'?
Your financial independence factor really focuses on financial independence. It's looking at: "How many days each month can my passive income pay my bills?" There's a really fairly simple formula - it looks kind of complicated, but it's actually pretty simple - that will tell you how many days each month your passive income can support your lifestyle. Basically, you start off by putting down your passive income - sources like rental income, Social Security, maybe you have a pension, royalties (if you wrote a song and get money every month). That's included in passive income. The next piece of income to look at are your investments. Total all of your investments - your CDs, your IRAs, your 401(k)s, your taxable accounts. Whatever they are, wherever they are, add them up, put that here, and multiply it by .33%. Why .33%? It seems kind of arbitrary. What that means is over the course of a year, it's about a 4% return, a 4% withdrawal rate. If you have a million bucks and you earn 4% per year, you can conservatively take out about $40,000 a year without dipping into the principal. You would put that here. You would then total what is the total monthly income that you get from passive income and from your investments. You then look at your monthly expenses. Add them all up; put it here. You divide your income by your expenses, and you multiply it by 31. And the result is the number of days per month your income will pay your expenses.
