Well, here we are again — I have yet another financial calculator to share with you.
And this one is the granddaddy of them all!
Just so everyone is on the same page, I’ve recently introduced two new calculators.
One deals with the impact growing your career can have on your finances while the other answers the question, “When can I retire?”
I love these calculators and what they will do for ESI Money readers, but I also wanted to have one that encapsulates the essence of the E-S-I philosophy. So today I’m introducing the ESI Scale Financial Independence Calculator.
What is the ESI Scale?
For those of you who don’t know, E-S-I (in the name of this site) stands for earn, save, and invest. These are the three steps to wealth highlighted from the very beginning of this site.
Since I laid out my philosophy in that original post, I have added to the E-S-I teaching by illustrating how people can work the ESI Scale to financial independence (FI).
After that post, a reader used the principles and shared his example of working the ESI Scale. I loved what he did, decided I wanted more, and started the ESI Scale Interview series.
All of these posts focus on the three principles I espouse (the same ones I used to grow my net worth) and illustrate the various ways people use them to achieve FI. Some are heavy on one or two, while others are decent on all three. But whatever the combination, they can all add up to success if worked correctly.
I like the ESI Scale approach for many reasons, but my top to have to be:
- It’s easy to understand and explain. It includes just three steps and they are pretty simple. Yes, people can become wealthy by doing the basics.
- It worked for me. Need I say more? 😉
To supplement all these posts I wanted a calculator that helped people work the scale for themselves. Now I have the right tool to do that.
What is the Calculator Designed to Do?
The calculator was created to help the user realize where they currently stand in each of the three areas — earning, saving, and investing — and how that leads to FI (how many years until freedom).
Then they can play with the inputs to see how their actions impact the road to financial independence.
From there they can make plans based on the inputs and get to work on them.
The calculator literally helps them to work the ESI Scale to reach financial independence.
We’ll get to the specifics in a second. For now, here’s the calculator…
ESI Calculator Inputs
As you might imagine, there are three main input areas to the calculator.
The first focuses on earning and includes the following:
- Salary -- Here you record your current annual salary as well as the annual increases you expect to receive. To dive deeper into how to make the most of your career and earn more, check out the impact of growing your career calculator. In fact, it's probably better to work out that calculator first, then come back here and input the results into this calculator. (Yes, we thought about merging the two of them, but we didn't want this one to be as big as King Kong.)
- Side Hustle -- Enter in the annual profit amounts you think you can earn each year from a side hustle. These inputs let you assume that you 1) don't want a side hustle (enter all zeros), 2) start a side hustle and grow it over time (add increasing numbers through year 5), or 3) already have a side hustle at its full potential (put all same earnings number in all boxes).
- Other Income -- This includes any other income you have. It could be from interest, dividends, rental income, or anything else. It's listed as one number for the current year but assumes you earn that much each year. If it changes dramatically from one year to the next, you can either use an average or come back each year and get a new reading.
Next is the "save" area which is actually quite simple. Just select the percent of your income (which you just entered above) that you plan on saving each year. Slide the scale to the correct percentage and it will automatically tell you the amount as well. You can enter in an average amount over the years or you can come back each year and adjust if it fluctuates widely.
Then there's the "invest" section which has two simple inputs:
- Current Investment Balance -- This is the amount you currently have saved to either drawdown or earn income from in retirement. It could be in brokerage accounts, 401ks, Roth IRAs, or anywhere.
- Annual Return on Investments -- This is the growth rate for the retirement funds you have already saved and for those you plan to save between now and FI.
Once you have all these recorded it's time to see how they add up to financial independence.
To do this you need a few more inputs as follows:
- Expected Annual Spending in FI -- This is the annual amount you'd like to spend when you become financially independent -- the lifestyle you want to have when you are FI. It's in current year dollars.
- Annual Spending Inflation -- This is your estimate of what inflation will be from today until you reach FI (the calculator will tell you how many years that will be.) Because of inflation it's going to take more money to become FI in 10 years than it will today.
- Assumed Withdrawal Rate or Earnings on Assets -- This could represent several options depending on your circumstances: 1) what percentage of your assets you're willing to spend/withdraw during retirement/the time you begin living off them (4% is the standard, but you can pick a lower percentage for more safety), 2) the earnings you might have from your assets in FI/retirement (for instance, your retirement assets might all be in real estate which churn off 8% annually in income), or 3) a blended rate of the two (an example would be 4% withdrawal of assets and 10% earning on real estate for a blended rate of 7% per year). Put in a percentage that fits your circumstances.
Now that you have everything recorded, you are ready for the results.
Calculator Results
At this point you'll see big letters stating:
YOU'RE ON-TRACK TO REACH FINANCIAL INDEPENDENCE IN:
And then a big red box with the number of years.
This is how many years you have left to reach FI given the inputs you selected.
Below the red box there's a blue box that says "click to show detailed results". If you click that, you'll get a chart and a table showing the balance needed to reach FI, your actual balance in any given year, and where the latter surpasses the former -- which is when you become FI.
One note on the numbers: If you enter in any amounts for the side hustle numbers, the balance needed to reach FI will dip in the first five years as the new income pours in. Then it starts to go up as income remains flat and yet inflation takes its toll on your spending needs.
Now look at the results and begin to analyze them. From here you can see where you are and plan to make changes.
How to Use the ESI Scale to Reach FI
I've said all of this in various places, but let's just review the key steps anyone can take to drive towards FI (which are reflected in the numbers above):
- The higher the starting salary you can negotiate, the better. That's why it's a great idea to learn how to negotiate your salary and do so every chance you get (whether it's for a new job at a different company, a promotion at your current employer, or even if you're in the same job but hitting home runs every day.) The real impact of this effort can best be seen on the impact of growing your career calculator.
- Working to grow your income by getting higher annual increases is worth both your time and investment. This is because even a 1% increase in annual raises makes a HUGE difference. That's why you should spend time implementing the seven steps to growing your income as well as spend time and money developing skills that can help you earn more.
- Develop and grow a side hustle. I've detailed the fact that a side hustle is so powerful that it can help you retire in 10 years. This calculator illustrates this point. If you're looking for opportunities, here are some side hustle ideas worth considering. If you're a writer, you may want to consider starting your own blog.
- Save more. Save as much as you can as soon as you can as often as you can. By saving more now and adding to that amount aggressively each year, you will hit FI faster.
- Maximize your assets. Obviously the more you have saved already the better off you'll be. But you can also work to deploy your assets in different ways to make them more productive. For instance, I started by investing in index funds. Then I took some of my savings, invested in real estate, and started to earn 10% on my money instead of much less. I also bought a business and turned cash earning almost nothing into a 50% return on my money annually.
- Learn to live on less. It's certainly easier to hit FI with a $40k spending need rather than a $60k one.
On a final note, as you plan what financial independence looks like to you, be sure to build in as many margins of safety as possible to protect yourself from any unfortunate circumstances that may pop up.
Look the calculator over and let me know what you think of it.
Tim Woodward says
Hi,
Great simple to use calculator. I do have one question tho, does the calculator carry the side hustle income past year 5? I see it says (and beyond).
Tim
ESI says
Yes. It assumes you max out your earnings in year 5 and then keep that amount for years 6+.
Dollar Policy says
Great content! According to the calculator I have 25 years to FI.
What does it say about my life and career if I want to skip forward 25 years?
Kerry says
I can retire when I’m 68! Awesome :/
Bill says
Love it ESI!! Any thoughts to adding Tax on Retirement Income?
ESI says
That’s included in “Expected Annual Spending in FI” since it’s an expense.
Cody @ Dollar Habits says
What an awesome resource! Thank you, ESI. Now to play with the inputs to bring that big red number down. 😉
Dan says
nice, but SS plays a big role, any chance to incorporate? Plus longevity, or estimated lifespan. And I guess no Monte Carlo analysis to give a probabilistic assessment.
ESI says
There’s always a balance in creating any calculator between making it short and sweet (and thus usable) versus long and complex (with more detail). There is ALWAYS something that could be added, but you have to make choices.
Thoughts on your comments:
1. I personally don’t count on SS and consider it to be a margin of safety. If you wanted to incorporate it you could calculate your expected spending and subtract your expected SS benefits.
2. Have you heard for the 4% rule? Longevity is automatically baked into it, no?
LR says
A couple questions: Does this calculator take into account longevity? Lets say I retire early at 45 and live to 100, is this calculator accurate to use? It is assuming no principal draw down thus the time-span after financial independence doesn’t matter?
Separate from the calculator… is the standard 4% withdrawal rate a safe rate to use for early retirees who will have a longer retirement period? Have you done on article on this before?
Overall – I love these new calculators! I just want to make sure I understand how they work!
ESI says
1. See above on longevity. The 4% rule incorporates longevity. To have a margin of safety use 3.5% or 3% if you like.
2. I have not done an article on it, but I probably need to. Here’s a link for now:
https://www.investopedia.com/terms/f/four-percent-rule.asp
It’s called the “4% rule” but should really be called the “4% rule of thumb”. It’s a guide, not a guarantee.
That’s why I would A.) use a lower % in my estimations and B) use the calculator several times, maybe every other year or so, to check my progress as I got closer to retirement.
3. I would NEVER retire without a few margins of safety and I would NEVER retire at the point where I “just made it.” You need to plan for contingencies, just like it’s done with an emergency fund in the pre-retirement phase.
LISA MEASE says
4 years to go!! Right on target. Love it. Thanks so much.
Patsy says
Well, if I keep doing things the way I have been so far, it looks like I’ll be working for quite a while! Time to launch that side hustle idea I have been mulling/ working on the last couple of years…. And hopefully it will provide enough side income to reduce the time to FI significantly!
JoeHx says
The calculator gave me a result of about 15 years. I had talked with my wife the other day and we had mentioned a goal of 10 years. I think I was a little more conservative in the values I put in the calculator, though.
Cooper The Millennial says
This is a very helpful and easy calculator compared to some of the other clunky ones out there. Generally I feel this is pretty accurate for what I have projected on my own.
Coopersmith says
Nice Calculator.
It says what I all ready know but will work a few more years. I am going to be quite conservative and have more than what I need. What also will be a plus is if I do a side hustle or gig that is even more of a bonus.
Jason says
I like the calculator. When I first put in the numbers it said I could be FI in 2 years, but when I adjusted it another it said 10. 10 is probably closer, but I hope to be there in 7.
Shawn @ Freedom 33 says
I may have missed it, but I think a few qualifiers would help in the calculator itself in order to avoid needing to cruise the ‘instructions’. Example, ‘net salary’ vs. ‘gross salary’. Thanks for putting this together! Have you cruised the Nomad List calculator before? (or the site in general?). It’s kinda cool. And the results are pretty consistent between your calculator and it, at least for my situation.
Amy says
Thank you for the awesome calculator! It has helped my partner and I start talking about FI. Question though, is the amount you set for savings assumed to be invested? Can you please clarify how the savings amount is factored into the FI number calculated? Thanks!
ESI says
If you mean the amount under “invest” then it is assumed to be invested, but you can put it at whatever % return you like — all the way down to 1%.
If you have some invested at X% and other invested at Y%, take a weighted average investment rate.
Amy says
Thanks for the quick response! To clarify, I was referring to the “Save” section with the slider for “Saving 20% of total income ($13,200 this year)”. I am trying to understand how this percent saved is calculated toward FI. For example, our goal is to save a high percentage of our income each year and then invest it not keep it liquid.
ESI says
It’s assumed that the “save” amount is moved to “invest” each year and gets the return rate stated in the invest section.
Ms. Fiology says
I love your calculators. This really helps me see how side hustles can truncate the time it’ll take me to hit FI.
Thanks for keeping it simple, “It’s easy to understand and explain. It includes just three steps and they are pretty simple. Yes, people can become wealthy by doing the basics.” There is certainly a time and a place for complicated formulas, but a simple approach to personal finance and wealth building creates a low barrier to entry for many.
Rick says
Yay, I can retire today, but I already knew that. I’ve already set the date for January 8, 2019 and most of the time between now and then is either vacation or sick leave!!!
Spaceman Spiff says
HI, great calculator. I’m confused about one thing though. How can a single value encompass both a liability (draw down rate) and an asset (earnings)? I am referring to the “Assumed Withdrawal Rate or Earnings on Assets”. thanks!
ESI says
I use the 4% rule in this calc that says your savings should last 30 years+ at 4% withdrawal rate.
If you want it to last longer, you can withdraw less than 4%.
Also, as noted, this calc, like any calc, should be a GUIDE, and is not meant to replace other planning factors (especially the margins of safety noted above).
Rob says
I know this is old now, but I’m with Spaceman on this one. Combining these 2 metrics isn’t very clear. One is a drawndown and one is income. Logically they are opposite. Also, when I increase the withdrawal rate my years to FI is decreasing. Either I’m not understanding or something is incorrect.
ESI says
How are drawdown and income opposite?
One (income, combined with savings and investing rates) gets you to the other (what you can draw).
Rob says
They are opposite in their effect on your retirement accounts. Income allows you to NOT have to draw from those accounts. Yet in the calculator, if you increase your withdrawal rate (depleting your retirement accounts) it shows the number of years to FI decreasing. Those 2 things don’t add up.
ESI says
You’re not understanding it correctly.
This calculator has two parts — the “building assets” part and the “withdrawing assets” part.
The income portion is in the building assets part. You earn an income plus have a side hustle, save a bunch, and invest it. These three steps (ESI) allow you to build up a nest egg.
The second part then allows you to set parameters on what you want your FI life to look like — what do you want to spend, how much are you willing to withdraw, and what do you think about inflation.
Put those together (what you are doing now + what you want FI to look like), and the calc tells how to get there.
As for the withdrawal rate calcs, I’ll email my developer and have him chime in with details.
Chris @ Keep Thrifty says
The withdrawal rate dynamic is a result of how we’re treating the withdrawal rate. We’re allowing you to select what you think a perpetual withdrawal rate is. Consider researching the Trinity study for an example of this methodology.
We are assuming you can withdraw that rate in perpetuity – we’re not calculating when your accounts hit zero. Based on that, think of withdrawal rate in this calculator as a measure of *risk tolerance*. The higher your withdrawal rate, the higher your risk tolerance.
When you choose 5%, you are assuming fairly favorable market conditions (the simplified version is that your withdrawal rate plus inflation should roughly equal average expected long-term market returns). If you choose 2.5%, you are assuming a weak market.
Chris @ Keep Thrifty says
I should finish my thought up there, shouldn’t I?
If you have a higher risk tolerance, you can retire sooner because you’re expecting your investments to do better in retirement. If you have a low risk tolerance, you’ll need to save a bigger nest egg in order to meet the same annual cash flow.