Financial Independence? The Earn to Burn Ratio

Financial Independence Revealed In Your Earn to Burn Ratio (lets keep it simple)

The quest for Financial Independence (aka Financial Freedom) too often provokes more questions than answers.  Ratios and advice are often complicated and lacking. 

For the emerging college student, once you hit the workforce there is a flurry of demands that come at you.  Building financial independence is seemingly complicated, and the notion of retirement is so far off, new hires do to little to nothing.  That is a very bad place to be.

Here is a very simple model so you can assess exactly where you are relative to Freedom, and how you can get there.

You need to know your Earn to Burn Ratio.  When your Earn-Rate (The amount of money that flows your way from your investments annually without you working) exceeds you Burn-Rate (What is costs to be you annually) you are Free.

At retirement “Financial Independence” is often derived from prudently eating into you assets in a manner that hopefully will not deplete prior to the end of your, and your dependents lives.  The conventional wisdom varies on the amount of the withdrawal but most say it is in the neighborhood of 4%.  One potential flaw with this is that if you calculate wrong with either your annual Burn-Rate or the length of time you or dependents will live, you come into a major economic predicament when you are the most venerable and least able to affect a solution.

This depletion of assets often works, but in your early 20’s you should aim higher.  In retirement if you are living without depleting principle, you are bullet proof.  How do you do that, often called ‘living off of  interest?’  You derive that income stream from Income Producing Assets that you build up over the course of your career.

Earn-Rate - Income without you working from Income Producing Assets:

  • A Business
  • Real Estate
  • Paper
    • Stocks
    • Bonds
    • Mutual Funds
  • Policies
    • Defined benefits program(s) (pensions)
    • Social Security
    • Annuities

Burn-Rate - What is costs to be you on an annual basis.  This is why it is key to manage not only your portfolio but the cost of your life-style as well (shoot for debt free by the time you retire).  It is that balance that derives true Freedom.

Remember, there will be a day when you want your freedom.  You want to keep your lifestyle (or even enhance it) and then do whatever you want.  A point where you have enough discretionary money and discretionary time to follow your hearts desire.

If you want to work beyond that point wonderful.  But I call this working at your pleasure.  Working because you want to, not because you have to.  That is a wonderful place.