Calculating when you can say: F-You

Money buys freedom. Yet most people don’t know how much their freedom actually costs.

My favorite personal finance concept is F-You Money, which is the amount of money required for a person to achieve full financial independence. That is, for said person to choose to start a business around a passion, choose to work in a cube, or simply choose to sit on her couch for the rest of her life.

F-You money varies greatly depending on the individual. This article teaches you how to calculate the exact amount of wealth you need to buy your freedom.

Why should I care about my F-You number?

How the hell do you expect to retire someday when you don’t even know how much money you will need?

Personal finance education is not taught in the United States, and as a result most Americans don’t have a clear sense of what it takes to retire comfortably. Don’t feel bad if this is you, I didn’t know what my F-You number was until two years ago (when I was 30) and forced myself to start researching financial freedom strategies.

Knowing your number sets a goal post. When you have a number in front of you, you can then create a strategy to buy your freedom.

First, some important assumptions

The following are assumptions that I use to personally guide my F-You calculation:

1. Most of your wealth will be held in a well-diversified set of index funds. Index funds are basically low-cost mutual funds that can represent various market/asset segments, such as real estate (REITS) or large Fortune 500 companies (S&P 500 Index).

Still confused? No problem, read Jim Collins’ epic series on stock investing for more background.

Too lazy to read all that? No problem, park your money in Wealthfront (affiliate link) and automatically get your investments diversified for you in a low-cost way.

I strongly believe that investing in the market, via holding diversified index funds, is one of the most effective ways to create wealth. Read up on Modern Portfolio Theory to understand this perspective some more.

Also, for the purposes of this article, do not consider the value of your primary residence as part of your wealth or net worth.

2. By parking your wealth in the market (index funds), you will enjoy a 7% average annual return across your investments. The key word here is average. Sure markets go up and down year to year, but over longer periods of time (10+ years), markets consistently have moved up and to the right.

Take the S&P 500 index for example. The S&P 500 is an index representing 500 large companies listed in the NYSE and NASDAQ. From 1975 thru 2013, the S&P 500 Index has returned an average of 10.14% annually. Keep in mind that this 10.14% annual return includes three catastrophic financial events: Black Monday (1987), the Dot-com Crash (2000), and the Great Recession (2008).

You should expect volatility, but I don’t think it’s a stretch to assume that a diversified portfolio of index funds can perform well over the long-run. I’m not alone in assuming 7% annual returns as a benchmark.

3. Inflation will be 3% on average. Inflation is a bitch. If you’re not familiar with the concept, it’s the idea that the stuff you buy goes higher and higher in price over time.

It makes your money worth less and essentially eats away at your gains. If you have a 7% annual return one year, then with 3% inflation your money actually grew only 4% (7% – 3% = 4%).

Like the stock market, inflation is somewhat volatile year to year. But since the mid-1980s, the Federal Reserve has developed some good techniques to tame inflation. From 1985 to 2012, annual inflation has ranged from -0.4% to 5.4%. For most of the past 20 years, annual inflation rates have hovered between 2% and 3%.

I feel comfortable assuming that 3% is a good annual rate for the future.

4. You will live off 4% of your portfolio until you are dead. Mr. Money Mustache has an awesome article about the 4% Rule. This is the concept that for each year that you are “retired”, you will skim 4% off your total portfolio to pay for your living expenses.

Example: let’s say that you have a $1,000,000 portfolio of wealth that is resting in a nicely diversified set of index funds. Applying the 4% Rule gives you $40,000 to live on each year, pre-tax (we’ll talk more about tax in a moment).

But what’s really amazing about the 4% rule is that it allows you to skim money from your portfolio but still keep your wealth intact, even with inflation eating away at your gains. Just to recap:

  • Assume your portfolio is growing by 7% each year annually.
  • You are skimming 4% to cover your annual personal expenses.
  • What’s left is now: 7% – 4% = 3%, which are the gains your portfolio will make to offset inflation!

So let’s go back to that example of the $1,000,000 portfolio:

  • At a 7% annual return, you will make $70,000, making your total portfolio size $1,070,000 at the end of the year.
  • You are skimming 4% for your own personal expenses, which is $40,000.
  • That leaves $30,000 in gains that will stay in your portfolio, leaving your total wealth to be 1,030,000.
  • That 3% gain of $30,000 in your portfolio will perfectly cover the 3% annual inflation that everyone loves to see eating away at their wealth each year! (cough, sarcasm)

Assuming these assumptions hold, then in theory you would be able to live forever from your portfolio, allowing you to maintain your quality of life of annual expenses AND adjust for inflation over time.

Again, read Mr. Money Mustache’s article on the 4% Withdrawal Rate, he explains the principle way better than I ever could.

5. You will have to pay taxes. Today the federal capital gains rate (that is, the taxes you pay for selling assets you held onto for over a year, like stock) is 20%. And, you also have to pay state taxes, which vary a lot depending on where you live.

Where I live in California, that additional state tax can be as high as 13.3%. But there are other states, like Nevada, which have no state income taxes.

Figure out your own state’s tax rate and adjust your total tax rate (state + federal) as appropriate. Also understand that in the future, your federal and state congress may choose to hike up or down your capital gains tax rate at any time. So that sucks.

6. Final assumption, I am oversimplifying things a lot. You might have access to other assets that produce wealth for you, other than stocks, bonds, and index funds, like: renting out real estate, Bitcoins, pensions, and precious metals. Maybe Social Security will even be around for us when the Millennial generation gets old (though I wouldn’t count on it).

There is no one-perfect financial strategy for everyone. Note that I am not a financial professional, just someone passionate about freedom.

Alright, how do I calculate my F-You number?

Here’s the formula:

F-You Formula

Let’s break this formula down:

  • Amount of money to live comfortably for a year – This includes expenses like your mortgage, clothes, travel, going out to eat — everything.
  • Multiply by 1.5 – We’re adding a 50% premium to what you need to live comfortably because of the fact that you need to pay taxes on the money you withdraw, fix your old roof, take care of unexpected health problems, etc.
  • Multiply by 25 – This is an important step to represent the fact that you will be drawing only 4% out of your total F-You pot each year to live your life.
  • F-You! – aka, freedom!

Let’s see an example of someone who determines that she needs $100,000 per year to live well:

F-You Example

In this example, you’ll see that this person’s F-You number amounts to $3,750,000. If she has this number today, she will be financially free to do whatever she wants for the rest of her life, so long as she keeps within a $100K/year budget.

And that’s an important caveat, which is that this formula only works when you stay within a specific lifestyle. If you reach your F-You number for a $100K/year lifestyle, but then suddenly decide to spend $800K for one year, then your financial freedom will no longer be sustainable.

So, if this person skims 4% from her $3,750,000 nest egg, that leaves her with $150,000, which should give her $100K to live on, plus $50K to pay her taxes and cover other unexpected expenses that happen in her life.

Don’t forget about inflation

Let’s carry on with the example of the person who says that she can comfortably live on $100K/year forever. Let’s say that she gets excited by seeing the $3,750,000 number because she thinks she can hit level that in 10 years with aggressive saving and investing.

Sorry to dash your dreams, but you have to remember that inflation makes your F-You number grow each year. In the assumptions outlined earlier, we target annual inflation as 3% per year.

Thus, $3,750,000 today is equivalent to 5,039,686 in 10 years, assuming 3% annual inflation.

To calculate what your F-You Number will be in some number of years into the future, use this formula:

(F-You Number) x (Inflation Rate)^(Number of Years) = F-You Number in the Future

Here’s the calculation showing the equivalent value of $3,750,000 in 10 years, assuming 3% annual inflation:

$3,750,000 x (1.03)^(10) = $5,039,686

I understand the formula to calculate my F-You Number, but what exactly is my F-You Number?

The only piece of data you have to provide is the amount money you need to live comfortably for one year. It’s going to take some work to figure this out.

1. Sign up for a account. is an awesome tool to help you track and report your expenses and earnings over time. It’s free, so sign up for an account and connect all your banks, credit cards, and investments into the software.

Sign up for

2. View reports of your spending over the past year. After you log into and connect your accounts, you can go to the “Trends” tab at the top of the page to view reports. The “Spending Over Time” report should give you a report on your expenses. You can pick a one-year time frame to see what one year’s worth of spending looked like for you.

Extra Credit: you may want to invest some time in Mint before your review these reports to tag your transactions individually over the past month (or even better, the past year). This will ensure that your reports are much more accurate when you run them. Sometimes Mint gets a bit buggy, auto-categorizing transactions like a bank transfer from one account to another as an expense. Tagging your expenses will make sure you catch these errors so they don’t get reported.

3. Plug and chug. Take your annual spending number from Mint, bring that number up or down based on your judgment of what you need to spend each year to be comfortable, and apply that number to the F-You formula above.

Final tips

You may need to re-visit your F-You Number several times in your life. For example, if you decide to have kids in the future this may change your spending assumptions.

If you are not at your F-You Number today, there are two techniques to help you get to your freedom quicker:

  • Earn more. Obviously, the more money you earn, the more you can save and invest. For inspiration on how you can make more money I highly recommend reading Ramit Sethi’s blog, I Will Teach You To Be Rich. And read Jim Collins’ blog to learn how to invest and retire well.
  • Spend less. Spending less money gets you to a lower F-You Number. To learn how to super-optimize your spending, read Mr. Money Mustache’s blog and see how he lives like a king and supports his family with less than $25K/year.

I wish I could take credit for inventing the F-You Number principle, but really all I’ve done in this article is re-state concepts I’ve learned from many other resources; especially from the three bloggers mentioned above. Read these blogs and definitely do your own research.

A big thank you to Stacey Ferreira, a rockstar 20-year-old entrepreneur, who inspired me to write this article due to a personal finance Facebook thread she started a few months ago.

If you have any questions about the concepts shared in this article, please leave a comment and I’d be happy to clarify.

Special thanks to Vincent Pham for reviewing and providing feedback for this article!

13 thoughts on “Calculating when you can say: F-You

  1. adena

    Great advice! I’ve been investing since I turned 22 but the F-you # seems impossibly far away. It’s always nice to have solid calculations to understand just how impossible/possible it is. I figure I’ll retire at about 30%-50% of f-you and move to a country where that = 200% of f-you.

    1. Eric Post author

      That is such an awesome perspective. F-You money in the San Francisco Bay Area is very different vs. F-You money in Costa Rica…

  2. Robby Ratan

    Am I reading your formula wrong or is the value of 25 suggesting that you only expect to live for 25 years on your nest egg? …maybe you should add a variable that’s based on a health age calculator and expected inflation in life expectancy. There must be someone claiming to have constructed this already, right?

  3. Jonathan Buenaventura

    Robby, I’ll answer for Eric since he’s probably having awesome sushi now. The 25 is a modifier that assumes that you take out 4% a year. Eric’s formula doesn’t take into account any aspect of life expectancy. It assumes that with average investing growth of 7%, 3% inflation, and 4% burn rate…your portfolio will last as long as you live.

    1. Robby Ratan

      Oh, duh. multiplying by 25 gets you to your total f-you pot. I was thrown off by “each year to live your life.” I think I read it as each year you live your life. Thanks friend!

  4. themoviefiend

    It seems like the 7% growth rate is a bit generous. That assumes you have all your money in stocks, doesn’t it? For portfolio security, shouldn’t you have at least a quarter of your money in bonds, and probably more when you get older when it won’t be as easy to re-enter the workforce? Anyway, I know you’re simplifying things–I just thought maybe it would be better to choose a more conservative number so people don’t think they’ve achieved financial freedom before they really have. I’ve been obsessed with ERE for some time now!

    1. Eric Post author

      It may be generous. I definitely encourage people to modify my formula based on the assumptions they are comfortable with!

  5. Jonathan

    Yes, ultimately, you should tweak it based on your assumptions. In the long term, I don’t believe Eric’s are completely out of whack. My personal view is to keep an eye on your inflation assumptions. Core inflation is heavily tied to wage inflation, and wage inflation only occurs when the economy is doing well, companies are doing well and need to find and pay their employees, which means a diversified portfolio of these companies’ stocks will do well. If you imagine that a diversified portfolio correlated to the overall domestic economy will underperform, it most likely means that inflation is also lower…and you can decrease your burn rate. I’m actually quite skeptical of core inflation calculations since I don’t quite accept the basket of goods used and the locales used. The really Jedi version would be to use something like Mint to track your own personal spending over a VERY long time. Not everything goes up in time, you might not be able to buy 10 cent hamburgers at Mickey D’s anymore, but how much did personal computers cost 10 years ago versus the virtual super computers you can get now?

  6. Jessi

    Hi Eric, I found your blog after reading your comments at This breezy article was able to clear up a couple things I found confusing. I would hug you if I could! Keep up the good work.

  7. Pingback: Q&A III: Vamos

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