How to plan a budget for a life you're not yet living.
If you’re pursuing financial independence, you’ve likely heard of the 4% rule — that simple rule that says you need to save about 25 times your annual expenses before you can live off of your investments and never work again (unless, of course, you want to).
But how do you know what your expenses will be in your post-FI life?
Some expenses could drop significantly or even disappear completely. While other expenses (say travel, for example) may actually go up. So, how do you figure out a budget for a life you’re not yet living?
To come up with our post-FI budget, we followed a few simple steps, and you can too:
1. Understand What Your Life Costs Today
If you’re already pursuing financial independence, chances are you have a good sense of how much you spend each month. If you don’t, creating a budget and tracking your spending is an important step.
Not only will this help you understand how much and how quickly you can save, but it will also provide an overview of your current expenses.
While your post-FI budget is sure to look a bit different, having an accurate sense of what your life costs right now will provide an important starting point to guide you as you create your post-FI budget.
For example, if you know exactly how much you spend to own and maintain a vehicle each month, you’ll know how much you’ll save if you decide to switch to public transit after reaching financial independence.
Want to travel twice as much? Consider doubling your current budget. Three times as much? Triple it. While this isn’t an exact science, you’ll be able to start getting a sense of how much you’ll need.
Essentially, by understanding how much you currently spend, you’ll be better equipped to estimate your post-FI expenses.
2. Reflect On What Will Change
Regardless of what your post-FI life has in store, chances are life will look a little different — and so will your budget.
If you’re pursuing financial independence with full force, you may actually want to spend more after hitting your FI number. We all have different paths to FI, and you may feel perfectly content cutting your spending back aggressively to reach your goal, but there’s a chance this won’t last forever.
Perhaps you’ll want to indulge in a few more dinners out each month, or a nice vacation once or twice a year. After all, you’ll have the time.
On the other hand, some of your expenses may drop significantly or cease to exist all together.
If you have a mortgage that you’re planning to pay off before reaching financial independence, you may be eliminating a significant portion of your total expenses.
Other expenses that may go down post-FI include things like gas and maintenance for your car, money spent on clothing for work, and the added convenience cost of ready-made meals.
Reflecting on how your life will change is a great way to improve your post-FI budget. Think about how you plan to live — and then think about how each of your expenses will go up or down as a result of that.
With your current budget in hand, you should be able to come up with some fairly accurate post-FI estimates using this strategy.
3. Take Your Budget For a Test Run
Now that you have your post-FI budget, you’ll want to spend some time making sure you got things right. Sure, estimates are great, but how will you know you got it right?
It’s time for a test run!
A test run will allow you to see how close (or far off) your budget estimates are. For example, if you estimated a 20% drop in your grocery bill, take a trip to the store and see how far those dollars actually get you.
Did you budget enough to cover your post-FI shopping trip? Better yet, try actually living off of those groceries for a month and see how it feels. Was there anything you missed?
Repeat this exercise with any expenses you predicted going down post-FI.
For some expenses, you may need to use a bit of creativity. For example, perhaps you’re planning to save big by switching to public transit post-FI but can’t ditch the car quite yet.
Take a look at transit schedules and plan your routes around town. How much longer will it take you to get places? How much will it cost? Does it still feel like a worthwhile tradeoff?
Maybe. Maybe not.
Telling yourself you’ll cut back on spending once you’ve reached financial independence can be easier said than done. That doesn’t mean you can’t reduce your spending, but try to be realistic and make sure it will work for you in real life — not just on paper.
You can repeat this exercise for the expenses you want to increase post-FI, but it’s best to keep these test runs hypothetical to avoid blowing your budget.
For example, plan out a vacation from start to finish (on paper only) and see how much it costs. Does your post-FI budget live up to your expectations?
Taking your budget for a test run will give you added clarity around your post-FI budget, and it may even send you back to the drawing board a couple of times.
That’s okay — better to figure it out now and adjust your plans accordingly.
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