A little explanation about my FIER (Financial Independence and Early Retirement) calculator.
This little spreadsheet was created, as I wanted a way to track my Increase in Net Worth, until I reached such a point that I reached that magical x25 number.
If you don’t know what the ‘x25 Rule’ is, it may be worthwhile checking out the post covering it here.
But, I decided to make it more complicated than that. Of course.
I decided I didn’t actually like the x25 rule as much as I liked. This came from the fact that not every part of your net worth will give you a 4% return on investment. Especially your home.
Despite my home making up a very large proportion of my net worth, it does not (and never will) make up a large proportion of my passive income. In fact, as it stands, it is making me 0% return on investment.
How is it different?
Most of the Financial Independence spreadsheets I have seen assume a 4% return on your net worth. As discussed above, this is not the case.
For my calculator, I wanted to be able to allocate different levels of returns depending on where the capital was invested.
For example, capital that is in the share market will, on average, on the long term, have a much higher return on investment that money that is sitting in a high interest bank account.
How it works.
Saving for retirement is all about habits, and this is how this calculator works.
With my FIER calculator, you simply enter into the assets spreadsheet, on a fortnightly basis, the amounts that are currently allocated to each of your asset ‘classes’. In here as well, you enter your expected return on that particular asset.
In the liabilities spreadsheet, enter where you owe money as well as the interest rate of each of these amounts.
From these amounts, the spreadsheet will automatically calculate the estimated passive income (from your assets) and passive loss (from your liabilities) which will be displayed in the passive income/loss tab.
The last thing you need to enter is your expenses for the fortnight. These are any expenses such as groceries, phone bills, car repairs: basically anything that isn’t interest on your debts.
The calculator takes all of these figures and:
- Calculates a rolling 12-month average for your passive income, earnings and your living expenses
- Calculates how much your savings have increased for the fortnight, and how much your savings have increased per fortnight on average over the past 12-months
- Based upon your average rate of saving, it calculates how long (in years) it will take for your passive income to cover your living expenses.
the truth is, I wanted to create a calculator that averaged out over a shorter time-frame (say 3-months) so you could track more recent improvement in your spending and earning habits. However, some large expenses (e.g. insurances, car rego etc.) only happen once a year and not including these may give an unrealistic view of your savings habits.
I could change my opinion on this in due course, and even as I am writing this I am sitting on the fence (for example, it may help in instilling new habits). I think in future iterations there will be a function combining the two so you can compare long-term and short-term savings habits.
How do I reach Financial Indpendence Sooner?
There are two main ways that this can be achieved, and they are easily accounted for in the FIER calculator.
- Save more (Spend less or earn more) – either way results in a greater increase in your net worth per fortnight and will get to to FI sooner.
- Invest in assets that have better returns – this is important, make your savings go to work for you by placing them in places where your returns are going to be higher that the average savings account
Because my FIER calculator makes it’s estimates by your rolling average of savings; you do not have to enter your earning into the calculator to make it work. It does all of it’s calculations based upon your savings habits and increasing Net Worth.
I have not included super in my calculations.
Although Super technically adds to your Net Worth; it’s not much good to you for early retirement when it’s sitting, inaccessible in your super account. Obviously if you want to be able to retire on the income generated from your investments, you cannot access the income from your Super Nest Egg until you reach the governments Super Maturation Age.
Sure, drawing down on your capital outside of super should be balanced out by the returns on your super fund.
With governments playing around with Super Rules, it’s not something I’d be willing to bank on. Who knows what might happen to the rules surrounding your super account in the future. I expect that the rules about who can access their super, how quickly you can draw down on these amounts, and how much it is taxed will be changed in the forseeable future and I don’t want to be reliant on it as my saving grace as I whittle away my savings outside of super.
Sure, there are arguments for and against including super in your calculations. Being the ultra-conservative pessimistic bean counter that I am who is increasingly suspecting of our governments ability to meddle with our ‘retirement nest eggs’ I just would rather be safe than sorry with my calculations.
Here it is.
v1.1 of my FIER calculator can be downloaded from here. Now, bear in mind that it is a work in progress, and I am having to relearn a crap load of excel commands as I’m building it, but more features will be added as I go.
Let me know what you think. Obviously it is a work in progress and there are plenty of limitations to the calculator (taxes for example).
But, it should prove as a good starting point.