How Much Do You Need for Early Retirement? (How to Calculate Your FI Number)

Summary

BiggerPockets Money Podcast Summary

Episode: How Much Do You Need for Early Retirement? (How to Calculate Your FI Number)
Release Date: July 11, 2025
Hosts: Mindy Jensen and Scott Trench
Description: In this episode, Mindy Jensen and Scott Trench delve deep into the concept of calculating your Financial Independence (FI) number. They explore the nuances of determining how much money one needs to retire early, considering various factors such as expenses, investment portfolios, and life changes.

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1. Understanding the FI Number

The episode kicks off with Mindy Jensen introducing the fundamental concept of the FI number, which is traditionally calculated as 25 times your annual expenses. She poses critical questions about whether this number changes over time and what factors should be considered when determining it.

Mindy Jensen [00:00]:
"Your FI number, at its very base, is 25 times your annual expenses. But does your FI number change over time? What considerations should you put into your FI number and how frequently should you revisit it?"

Scott Trench concurs, adding that while the 25x rule is a standard benchmark, there are nuances based on individual circumstances.

Scott Trench [00:28]:
"Yes, it's 25 times your annual expenses. Or if you're Frank Vasquez, you might argue it's 20 times your annual expenses. But there are a lot of nuances to that number."

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2. Personal Journeys to Financial Independence

Both hosts share their personal experiences in determining and achieving their FI numbers.

Mindy Jensen [01:35]:
Mindy recounts discovering the FI concept around 2012-2013 with her husband, Carl. They calculated their FI number using the 4% rule, arriving at approximately $1,120,000 to account for their investment accounts while deciding not to pay off their mortgage.

Scott Trench [03:43]:
Scott shares a similar journey, initially setting a $1 million goal around 2013-2014. He highlights the impact of his role as CEO at BiggerPockets and significant real estate appreciation on his financial trajectory.

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3. The Role of Real Estate in Calculating FI Number

A significant portion of the discussion revolves around incorporating real estate investments into one's FI calculations. Scott emphasizes the complexity of using real estate cash flow versus traditional investment portfolios.

Scott Trench [07:45]:
"If you're spending... your expenses are coming from the cash flow. How are they to think about this when they're determining their FI number?"

The hosts debate whether to include rental properties' cash flow directly in the FI number or treat them as separate income streams supporting their expenses.

Mindy Jensen [12:52]:
"If you're spending, if your desired spending target is $80,000 a year and $40,000 is a conservative approximation of the cash flow... then the rest of your fire portfolio would need to be about $1 million to generate the remaining $40,000 you could spend."

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4. Differentiating FI Number from Net Worth

A critical distinction is made between one's FI number and net worth. While net worth encompasses all assets, the FI number focuses solely on liquid and income-generating assets necessary for early retirement.

Mindy Jensen [13:56]:
"Net worth includes all of your assets, including your home's equity, your car values... In your FI number,... money tied up in your net worth is not to be included."

Scott agrees, emphasizing the exclusion of non-liquid assets like primary residences unless they contribute directly to income.

Scott Trench [15:28]:
"Don't include your home equity in your FI number unless you intend to use your home as part of that FI number."

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5. Budgeting Strategies and Spending Controls

The conversation shifts to the importance of budgeting and maintaining spending controls to ensure financial independence is sustainable. Both hosts highlight different approaches to managing expenses.

Scott Trench [26:18]:
"I think there's a concept of budgeting and spending controls that is absolutely essential at every part in that journey."

Mindy shares her approach to budgeting, especially in light of upcoming life changes like her daughter attending college.

Mindy Jensen [28:40]:
"When you' starting out, I think it's so important to be able to see in real time where your money is supposed to be going and where it's actually going."

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6. Adjusting FI Number for Life Changes

Life events such as having children, paying for education, or carrying a mortgage can significantly impact one's FI number. The hosts discuss strategies to adapt the FI number to accommodate these changes.

Scott Trench [34:20]:
"It's what's the number, the maximum that you would be willing to go to? And that is the answer that you put that in and that you subtract that from your portfolio."

Mindy provides a real-world example of setting a spending limit for her daughter's education to prevent financial strain.

Mindy Jensen [32:42]:
"We told our daughter we will pay up to $30,000 a year for your school. If you go to a school that costs $80,000 a year, you are on the hook for $50,000 a year."

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7. Practical Examples and Case Studies

The hosts delve into hypothetical scenarios to illustrate how various obligations like mortgages or gifts to adult children should be factored into the FI number.

Scott Trench [35:08]:
"So how do I think about some of those odd situations to feel comfortable spending at the 4% rule and pay my mortgage, which is a fixed unrelenting obligation for 25 years?"

Mindy Jensen [35:35]:
"At the time that we were calculating our fire number at 1 million, we bumped it back to 1,120,000, which was what we had left on our mortgage at the time."

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8. Tools and Resources for Calculating FI Number

Towards the end of the episode, Mindy and Scott promote resources available for listeners to calculate their FI numbers accurately.

Mindy Jensen [40:53]:
"We have a document that we send to anybody who was thinking about being on our Finance Friday episode that gives you... a free Excel spreadsheet that'll allow you to do this."

Scott adds that having a personal financial statement is crucial for an accurate FI calculation.

Scott Trench [40:53]:
"All this is just a DIY. Insert the numbers, and we've made a free Excel spreadsheet that'll allow you to do this."

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9. Conclusion and Final Thoughts

The episode wraps up with both hosts reflecting on the importance of understanding and regularly revisiting one's FI number. They emphasize that while the journey to financial independence is personal and unique, maintaining awareness and control over spending is universally essential.

Mindy Jensen [41:30]:
"I'm ready to go recalculate my FI number. How about you?"

Scott Trench [41:38]:
"Me too. Let's do it."

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Notable Quotes

• Mindy Jensen [00:00]:
  "Your FI number, at its very base, is 25 times your annual expenses."

• Scott Trench [00:28]:
  "There are a lot of nuances to that number."

• Mindy Jensen [13:56]:
  "Net worth includes all of your assets... In your FI number, money tied up in your net worth is not to be included."

• Scott Trench [15:28]:
  "Don't include your home equity in your FI number unless you intend to use your home as part of that FI number."

• Mindy Jensen [28:40]:
  "It's so important to be able to see in real time where your money is supposed to be going and where it's actually going."

• Scott Trench [34:20]:
  "It's the maximum that you would be willing to go to."

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Key Takeaways

1. FI Number Fundamentals: The FI number is a crucial metric for determining financial independence, typically calculated as 25 times your annual expenses.

2. Personalization is Key: Your FI number should reflect your unique financial situation, considering factors like investments, real estate, and life changes.

3. Real Estate Considerations: Incorporating real estate into your FI calculations requires careful consideration of cash flow versus principal investment.

4. Distinguishing Net Worth and FI Number: While net worth includes all assets, the FI number focuses solely on liquid and income-generating assets necessary for sustaining your desired lifestyle.

5. Budgeting Essential: Maintaining strict budgeting and spending controls ensures that financial independence remains attainable and sustainable.

6. Adaptability to Life Changes: Life events such as having children, paying for education, or holding a mortgage necessitate adjustments to your FI number.

7. Utilizing Tools: Leveraging resources like personal financial statements and Excel spreadsheets can aid in accurately calculating and tracking your FI number.

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For listeners eager to take control of their financial future, this episode offers a comprehensive guide to understanding and calculating the FI number, ensuring a well-planned journey towards early retirement.

Transcript

[Mindy Jensen]

Your fine number, at its very base is 25 times your annual expenses. But does your fine number change over time? What considerations should you put into your fine number and how frequently should you revisit it? That's what we're going to talk about today. Hello, hello, hello, and welcome to the BiggerPockets Money Podcast. My name is Mindy Jensen and with me, as always, is my calculating co host, Scott Trich.

[Scott Trench]

Thanks, Mindy. Great to be here with someone who excels at personal finance the way you do. Today, Mindy and I are going to be talking about calculating your FI number. Yes, it's 25 times your annual expenses. Or if you're Frank Vasquez, you might argue it's 20 times your annual expenses. But there are a lot of nuances to that number. And what compiles your fire number? What are the expenses you need to plan for? There's a lot of depth to this discussion and I'm excited to get into it with you today, Mindy. We have all heard of the Shockingly Simple Math to Early Retirement, which is a blog post written by Mr. Money Mustache some 10, 12 years ago. Now go check it out. If you haven't read it yet, we've discussed it multiple times here on the show. But the savings rate that you have and the amount you're going to spend after retirement may be different numbers. There may be different ways to massage or tweak that number. And we're going to get into all of that nuance here today on BiggerPockets Money. I think one of the best places to start on this is to talk from personal experience. Mindy, when did you decide on your fire number and what were your life circumstances like at that point in time?

[Mindy Jensen]

Scott, this was back in 2012 or 2013 when we first discovered the concept of financial independence and that you could retire early. We did the math per the 4% rule and our spend rate at the time and we came up with $1,000,000 or $1,120,000 because we wanted to have enough money to pay off our mortgage, but we didn't want to pay off our mortgage. My life circumstances at the time, I was a stay at home mom with two young kids. In 2012, I had a 4 year old and a 7 year old.

[Scott Trench]

Awesome. And, and what you said one 1.12 million and you talked about the paying off the home mortgage. Did you include your home equity in that calculation or were you excluding it with that statement?

[Mindy Jensen]

The 1 million was our investment accounts, our 401k Roth IRA and after tax brokerage accounts. And at the time that we discovered it, we were, I think this is on Carl's blog, at 586,000. So we had been saving, we were very good savers and investors already. And we just discovered what we were saving towards, which was financial independence.

[Scott Trench]

And then how long did it take you to achieve that number once you set out with that as the goal?

[Mindy Jensen]

It was supposed to be done in 1500 days, hence the name of the blog. But we actually achieved it. Whew. I, you know, it's been so long, I can't even remember when we got to our original number. But I'm going over to the blog. Three years later, 2013, 2014, 2015, and January 1, 2016, we hit $1,057,000. If you look back at the stock market then, it was just like hockey stick growth.

[Scott Trench]

That's true, yeah. Both of us enjoyed really good runs in the stock market and in real estate during our journeys to financial independence, which hopefully continue for lots of other folks. Mindy, did that number, that million dollar target net worth is much greater now. Did that target change or did you just continue to want to live at that same level, that same level of expectations, even as your wealth far surpassed that number?

[Mindy Jensen]

We continued working. Carl continued working through 2016 and then one more year. So through 2017 and he finally retired, our numbers stayed the same. We were, we were aiming for a million and we didn't change that number. I don't think we've ever actually changed that number. Although our spending is not in alignment with a $1 million portfolio, which would be approximately $40,000 a year. We've moved up in our spending to about 60 or $80,000 a year, depending on, you know, the year. We don't really have a budget. We're still really conscious of where our money's going, but we're not as tight as we used to be. If we were honest with ourselves, our new phi number would be 2.52 to 2.5 million. How about you, Scott? When did you calculate your PHI number for the first time and what was it?

[Scott Trench]

My phi number? I think like a lot of other people at that time, around just 2013, 2014 started out as a goal of $1 million. And that net worth threshold was likely. I say likely because it's a little hard to peg the current value of real estate holdings and, or the holdings in bigger pockets, which were my biggest investments, if you will, at that point in time. Those were likely crossed around the 2016, 2017 mark, generally speaking, because of the massive appreciation in real estate and my becoming the CEO and president here at BiggerPockets, and it's kind of interesting in thinking about what, you know, my circumstance at that point in time as I was a single guy just meeting my wife right around that same point where I achieved financial independence or that initial goal and my needs were very low at, you know, 30, $40,000 a year, it felt like a huge abundance, especially with no real massive outlay on housing. And that definitely would not be the target. With a family and two little girls, I would definitely want to spend much more, potentially much more. Somewhere in that eight to $10,000 a month range would likely be the goal. My financial portfolio allows me to spend even more than that, including full time daycare, for example, for two little girls. So that's, that's been a, the goal posts have absolutely shifted for me personally over the years.

[Mindy Jensen]

Let's see, how do I want to say this? Did your goal posts change as you spent more or did you consciously think about, oh, you know what, 1 million isn't enough, now I'm going to aim for 2 million? Or did, did your goals like, I didn't aim for 2 million. Our investments just kept growing so we started spending a little bit more. But I don't think we ever actually changed our number. Did you ever actually consciously change your number?

[Scott Trench]

Did I change my number? No. But a couple of things happened in my, my situation. First, same as you. The portfolio growth allowed for much more spending. So it was kind of like, why would I artificially keep my spending very low when I can easily spend much more? And there is benefit to spending much more money, of course, bring better quality of life in many, many areas. So that was one, one component of it. And the other was the nature of the CEO job at BiggerPockets, which was so consuming, offered high compensation. And it was like, well, if I'm, if I'm doing this thing, then I'm either not spending time with my family or not doing the right thing. For a company that employs 80 people and has shareholders and many, many listeners and followers and viewers. And so things like mowing the lawn or cleaning the house, those were things I outsourced at that point in time. I'm now reinsour because there's not, you know, now that I'm not doing the big job at BiggerPockets, it doesn't make sense to hire those things out the same way. But that was kind of an interesting mindset shift in terms of how, how to think about my spending and my fire number in the context of these changes with expenses that were clearly there because they were the right thing for that point in my life, but were not for a more frugal fire portfolio.

[Mindy Jensen]

I have another question about your FI number because you have a significant real estate portfolio. How did fine number change once you started getting all of this real estate cash flow? Did you think about I still need 1 million for the 40,000 a year or did you think my real estate is kicking off X dollars so now I don't need, I need less in my stock market investments?

[Scott Trench]

The latter. And this is something I've been struggling with all year. Right. I love the research we talk about with the 4% rule we've had. We've talked to Bill Bangin, we've talked to Frank Vasquez, we've talked to Michael Kitsis, many of the people who pioneer research in the withdrawal stage of a portfolio. And I just know that personally I'm not the kind of guy who at 34, 35, I'll be 35 soon, can actually spend, sell off my stocks and live off of that to fund consumption. And as a real estate investor with significant experience, I felt that I can better achieve my goals by thinking about my spending in terms of the income that my assets generate and staying within those limits. And that's the goal is I will always stay within those limits. I may earn more money like doing bigger pockets money, a job that I absolutely love and other things in the future, but I will spend as if my portfolio is the only component of that. And that may, that may cost me some opportunity cost. But as the portfolio grows, maybe I will reintroduce cleaning services and those types of things. It's just hard when I want to do work like this. My wife wants to write and the childcare at this season in our life is very expensive. So we can't have the childcare and have the house cleaned and, and, and, and, and, and there has to be some cutoffs and limits in place. And so we prioritize what's most important to us in that, in that spending and doing the lawn once a week is a small price to pay.

[Mindy Jensen]

Scott, you're turning into a true dad. Do you have New Balance sneakers too?

[Scott Trench]

Oh my gosh. I got seven copies of this Costco shirt. I got the mustache, the wood fired pellet grill, and then the. I don't have New Balance sneakers. I have, I have running shoes not.

[Mindy Jensen]

Quite full on, dad. Then Scott, you need a pair of white New Balance Tennis shoes if you want to be a true dad. But you're getting there. You're getting real close. Fanny pack?

[Scott Trench]

No, I don't have a fanny pack. And I'm not a mammal yet.

[Mindy Jensen]

What's a mammal?

[Scott Trench]

Oh, Google it. It's safe for work, but barely.

[Mindy Jensen]

Okay, how should you calculate your fine number if real estate is in your portfolio? We'll find out after the break.

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[Mindy Jensen]

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[Mindy Jensen]

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[Mindy Jensen]

Okay, so, Scott, somebody listening to this episode wanting to get a more accurate fine number for themselves with real estate as part of their portfolio, how are they treating the real estate? Because we're talking cash flow. I think real estate investors who want to be real estate investors are there for the long term cash flow more than the appreciation. I'm not really talking about flippers because that's. That's kind of short term gains. That's. That's income which should be invested in a different way or could be invested in a different way that would provide long term cash flow. But for the the rental real estate investors who have, let's say, 50% of their expenses, their current expenses are coming from the cash flow. How are they to to think about this when they're determining their phi number?

[Scott Trench]

I think you just think about it exactly like that, right? If you're spending, if your desired spending target is $80,000 a year and $40,000 is a conservative approximation of the cash flow net of vacancy capex those types of things from for example a paid off rental or two, then you're the rest of your fire portfolio would need to be about $1 million to generate the remaining $40,000 you could spend. So I think it's as simple as that. In the context of a real estate investment, a business might be thought of differently, right? Because the business income could be much less predictable, for example than real estate income. Over a long period of time, businesses can grow dramatically and shrink dramatically. So I think I would be reluctant to count business asset in my net worth statement unless it was very conservatively stated or about to be sold in the imminent future. Mindy, I think the first thing that we should talk about if we're talking about this concept of you're calculating your fire number is what is a fire number and how does it differ from a net worth statement?

[Mindy Jensen]

Ah, Scott, I think this is a really great question and something that the fi community hasn't really done a great job of separating out. I think for a lot of people, net worth and fine number are the same thing for a long time. If you're just starting out on your financial independence journey and your net worth is $20,000, it's easy for you to think of, you know, oh, I've got a long way to go to get to my fine number. But your net worth includes all of your assets, including your home's equity, your car values, your collectibles, all of the everything that isn't really going to generate cash flow and liquid investments that you can sell to fund your lifestyle. In your fine number, some people will say, well, I have a million dollars in net worth, but it's all tied up in my home Equity and my 401k and I can't access it. And money tied up in your net worth is not to be included in your fine numbers. I think I made a mis speaking a couple of minutes ago and said net worth and fine number as I intertwined them. I think it gets confused a lot in this community, but we definitely need to Be talking about financial independence. Number the amount of money that you are saving so that you can then start withdrawing from it at 5% per Frank Vasquez or 4% per Bill Bengen, or 3%, 3.25% per Big Earth.

[Scott Trench]

Yeah, absolutely. And I think for most people, it boils down to the very simple concept. Don't include your home equity in your fire number unless you intend to use your home as part of that fire number. So if you are living in a home that you expect to live in for the next 20 years, like me, you should exclude your home from your fire number. It's part of my net worth statement. I know that my home's value and I track that. If you said, what's my net worth? I would say it's my financial portfolio plus my home equity. I also include my cars, for example, my net worth statement. But I would not include my home or cars or personal property of any kind that was not intended to be sold anytime in the near future as part of my fire number. The fire number is the investment portfolio that is intended to distribute wealth that I can actually retire on. And that would include all of my investable assets. And I would include things that are illiquid in there, too. A business that is conservatively valued or likely to be sold, even if it's illiquid, can count in that fire portfolio number, just as a rental property can. Even though they're less liquid, you may want to think about them differently and how they're going to impact your ability to spend in early retirement a little differently than you would a traditional 6040 stock bond portfolio. But they're there. They're part of the fire portfolio. They're intended to be used to generate liquidity or cash flow that you'll spend.

[Mindy Jensen]

Scott, I would push back on that just a little bit and say that if your rental portfolio, the cash flow from your rental portfolio, you're planning on that funding part of your lifestyle in retirement, then I would almost count that as your net worth. But like the portfolio is your net worth but not your fire number, the cash flow affects your fire number. Does that make sense?

[Scott Trench]

Absolutely. So, so my rental portfolio, right, I'm only spending the cash flow that's generated by the rental portfolio. I'm not spending the principal in those properties. And I don't know any real estate investors or hardly any real estate investors who use that as a primary mechanism. Maybe, maybe you refinance one when your kid goes to college and that's how you pay for college tuition. But It's a rare person who's selling off rental properties, I believe, to fund consumption on a regular basis. But I think you got to include the rental equity in the fire number and the fire portfolio number. When you're thinking about what is my fire portfolio? Right. If you got $1 million in rental real estate that is part of that $2.5 million fire target, with the rest is that 6040 stock bond portfolio. I think that's a $2.5 million fire portfolio. I would argue it is, even though we're going to have to think about the distributions from the 1.5 million stock bond piece using the 4% rule. And we're going have to think about the income that the million dollar rental portion generates. What do you think?

[Mindy Jensen]

I think we're saying the same thing, but in slightly different ways. I would say that if you have a $1 million rental portfolio that kicks off 10,000 do month, then you can count that $1 million rental portfolio as $120,000 a year. I would also like that rental portfolio very much.

[Scott Trench]

I would say if that's your conservative approximation of spending, you're going to be just fine. Obviously, the big gotcha for a lot of real estate investors is those projections don't always map out. So it's a conservative interpretation of that cash flow. But my spending is governed by the cash flow generated by my portfolio, rental and stock bonds. And that's how I govern my spending personally today. That may change in the future if I begin to decumulate in some way, but that's how I govern it today.

[Mindy Jensen]

So, Scott, you mentioned that your fine number has changed because your life circumstances have changed and my phi number changed because my portfolio far exceeded my expectations. What are some of the things that changed in your life that caused your fine number to change? And did your fine number change based on those or based on future projections? Like when are you looking to define your fine number? Right now. You've got childcare, but you're not going to have childcare in 10 years. So are you looking at your number now or are you looking at Your number in 10 years?

[Scott Trench]

That's the fun of this game is everyone says nail down your spending. This is a much easier game, I believe, for someone who is approaching traditional retirement and has their spending for them and their spouse locked down and the kids are out of the house and the question is how much to give or not at that component of time. I think it's much more challenging for someone with young children to project these because absolutely there's childcare expenses which right now are very high. When my children are school age, my expenses will they'll still be high. I have no illusions that children are going that can be very expensive and that the most expensive years could be college. For example, I have assets set aside for college expenses that will be ready to go at that point in time. I think that my expenses will go down over the next several years or at least I'll be able to shift or alternatively I'll be able to shift spending away from childcare towards other items like maybe more travel. Travel is a much lower bucket of spending because we don't have the desire to travel quite as much with two young children that we might if we did not have those two young children.

[Mindy Jensen]

I heard somebody say, and I thought this was so brilliant. They're like, like traveling with two young children isn't vacation, it's just parenting in a different place.

[Scott Trench]

That is 100% correct. And my 2 year old, I'm sure she would love the beaches of Maui. She also loves the fountains at the local park. You know, and one does not involve a long plane ride. No matter how luxury you can spend on the plane ride, it's still a long plane ride to get out there.

[Mindy Jensen]

With a 2 year old when, when.

[Scott Trench]

They'Re 5, 7, 10, I think that'll be different. And then I think travel expenses will be much greater. But I also won't have daycare for two kiddos to pay for. So I think those things just change as life evolves. And I think that more important than what that spending. Trying to project that in great minute detail. It's what's a reasonably high ceiling for this spending? As long as I have the controls in place to stay inside that ceiling of spending, I maintain my position of financial independence. If I go beyond those, then I have that problem. So today I might might mow my grass and hire out the cleaning of the house less frequently. And in three years those may change dramatically. Are you setting the right spending ceiling for your financial independence goals? When we return, we'll break down exactly how your fine number should guide your annual expenses.

[Mindy Jensen]

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[Mindy Jensen]

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[Unknown]

Mobile with the price of just about everything going up, we thought we'd bring our prices down. So to help us, we brought in a reverse auctioneer, which is apparently a.

[Scott Trench]

Thing Mint Mobile Unlimited Premium Wireless how many get 30 30? Better get 30. Get 202020 better get 20 20. I better get 151515 15. Just 15 bucks a month, so give.

[Unknown]

It a [e-mail] Switch upfront payment of.

[Scott Trench]

$45 for 3 month plan equivalent to.

[Mindy Jensen]

$15 per month required New customer offer for first 3 months only Speed slow after 35 gigabytes of network's busy taxes.

[Scott Trench]

And fees extra See mintmobile.com.

[Mindy Jensen]

Thanks for sticking with us. What is a reasonable ceiling of spending? I don't think people are thinking about that. I think people are trying to keep themselves locked down into the smallest amount that they could possibly spend.

[Scott Trench]

I think the ceiling concept comes down to having the controls in place to spend appropriately in a budget. I think there's a lot of People out there that will benefit from the exercise of saying, myself, the amount I can safely spend is this and I must stay within it. And everybody needs to do this. From people who are broke and just starting to build that first hundred or thousand dollars in savings, to multi millionaires or even billionaires. They just call it cash flow management when you get into that super rich category, I believe, or so I'm told. But I think this concept of budgeting and spending controls is absolutely essential at every part in that journey. Even if it's just like what I'm doing, saying, here's the ceiling, we're very happy with it and provides a really good lifestyle, but we must stay within those boundaries. And that's the act of budgeting, accounting. If you're in business, nobody likes to do this. It's not fun to set limits and controls and project these expenses and track them. You must do them, I believe, if you want to confidently fire and confidently calculate your fire number.

[Mindy Jensen]

Do you check in on your spending monthly or weekly or just annually?

[Scott Trench]

I check into my spending monthly at the very least, and I'll kind of re approach it in the middle of it. But I found that active checking my spending on a monthly basis has been helpful, but not actually putting the pin in. I am actually staying within the bounds I want to set for myself. So I'm actually exploring a different tool which I think we'll talk about in a few weeks, that will actually physically force me to stay within those limits. Like you said, you're going to spend two grand on groceries or groceries and food and restaurants, and you are now over that limit. Well, better wait till next month on this. Start eating out of the pantry. We won't go that far with it, but that's the concept that I want to play with. And actually putting those limits in that forced me to stay within the boundaries that I want to set.

[Mindy Jensen]

Okay, so we're in different parts of our life. I am in the embracing more spending because my FI number has been met and we're good financially. We have more than we thought we were going to spend and we will be good. So I'm not super conscious of how much we're spending, but we do keep a loose track of it. In the past, I have been much more conscious about how much I'm spending in which bucket I'm spending. But now I've got a girl going off to college. We are taking her to college in the middle of August and she's going to be living on her own. She's going to need to learn how to navigate spending money. And I am using that same tool to help her learn how to spend, learn how to budget, learn how to keep track of her expenses so that she's not going over her budget. Because it's much easier for me to be like, well, I was. I budgeted $6,000 for this month, but something fun came up, and I'm now gonna spend 8,000. That's okay because I'm well within my means to do so. But when you' starting out, I think it's so important to be able to see in real time where your money is supposed to be going and where it's actually going.

[Scott Trench]

I think that there's a fundamental problem that a lot of people face in this community of, I'm tracking my spending, but am I controlling it to your point? And I think that that's going to be the big. The big challenge. You don't want a college student, for example, as. As responsible as I know your girls are to have unlimited access to something. There should be, hey, we're gonna provide for this. But you blow it this month. Go figure it out. You're an adult now. Until next month. I think that that comes back to calculating your fire number. Right. It's. Is. Is there a limit? I think a lot of people are scared or fearful or not pulling the trigger soon as soon as they could because they don't have these basic controls in place. I'm in that category as well because I didn't do this for the last year or so while I was CEO of BiggerPockets. I'm doing it now because my circumstances have changed. I've got a great situation. It's just I need to make sure I have those controls in place.

[Mindy Jensen]

Yeah. And I think that's really important. Make sure you have those controls in place. Just because Carl and I are not tracking every single penny to the penny doesn't mean we're not keeping an eye on it. When we're still conscious of loosely, how much of our money we can be spending, and when we feel like we are spending too much, we pull back. This year, we started off going on vacation, like, every weekend the first quarter of this year. And not only is that really exhausting when you're trying to keep up with school for your kids, but it's also just exhausting to be going someplace every single week. And, you know, my bank account was like, hey, give us a little bit of a break too. Now, Scott, do you give yourself any buffer?

[Scott Trench]

Yeah, absolutely. The buffer is actually for us, like two and a half thousand dollars in that at. For what's going to come up. Is there something going to break around the house? Is the car going to need new tires? Is there going to be. Who knows what exactly that's going to be. But on top of the things that we can't project, we put in place a pretty hefty buffer for life's requirements that come up in any given month.

[Mindy Jensen]

Okay, good. I'm glad to hear that.

[Scott Trench]

So do you.

[Mindy Jensen]

We don't have a buffer, but we have a general idea of how much we want to spend over the course of the year we're going to spend. Let's say it's a hundred thousand dollars this year. So that's what, $8,000 a month? Oh, okay. In January we went over. In February we went over. In March we went over. But in April we were way under. It's just kind of a. Keeping track loosely where we are at.

[Scott Trench]

How would you think about. I talked about this, the ceiling concept. But let's say that we're in a different situation. Let's say that we know that there's one expense left. Let's say it's college as an easy example. Right. There's just college and that's going to cost X amount over the next couple of years. We're not quite sure because our kiddo hasn't determined whether they want to go to the expensive private school or the much cheaper state school. And we haven't figured out if we're going to get any scholarship or other items that can come in to change that. How do we think about our fire number in that context?

[Mindy Jensen]

Wow. Okay. So this is kind of the exact situation that we found ourselves in last year. Our daughter wasn't sure which school she wanted to go to, the state school or the more expensive out of state school. She actually ended up going to the more, less expensive out of state school. So it's cheaper for her to go out of state than it is to go in state. Colorado, we did not qualify for any loans or any grants or anything like that. Well, loans, but they were unsubsidized. We are ending up just footing the bill for it. We have the means to do so. I think that if you are not financially independent and your child comes to you and says, hey, I want to go to this school. You should have a dollar amount that you are willing to pay. If you're willing to pay. I mean, zero is a dollar amount that you're willing pay. We told our daughter we will pay up to $30,000 a year for your school. If you go to a school that costs $80,000 a year, you are on the hook for $50,000 a year. That's $200,000 for a four year degree, which in the field that she's choosing is not going to get her anything. She will have to go to additional school. So she will already come out of school with $200,000 in debt. That was really eye opening to her to say, okay, well then I'm not going to go to that school. In terms of your fine number, I don't think it should count towards your fine number. Either way, it's, it's an expense and it's a fairly short term expense in the whole grand scheme of things. Just like childcare. You can determine that this is going to be something that I will plan for and save for for this X expense rather than thinking about it as I have to have this as part of my retirement account.

[Scott Trench]

I think that's a great answer, right? It's what's the number, the maximum that you would be willing to go to? And that is the answer that you put that in and that you subtract that from your portfolio basically or the amount you're going to need to accumulate for the next couple of years and add that in. I think that's a very simple and powerful answer for how to fund college. And if that's 80 grand a year, two kids, well then you're going to put in what is that, $640,000 and you're going to offset your fire number because you can't plan otherwise. You have to assume that that could happen. I love that setting of the limit tool that you used there. I think that's a very, very powerful approach. Let's do another one here. Let's do a mortgage on the home. So I've got a $300,000 mortgage. What's a typical mortgage payment on a home that has $300,000 left at like 3.5%. One of those old mortgages from five.

[Mindy Jensen]

Years ago, 13 or $1,500. That's what mine is.

[Scott Trench]

Perfect. Okay, so we have 1500 bucks. That's $18,000 per year, right? 15, 9. 1500 times 12. And the fire to back into would be 15 times 25, $375,000. So how do I think about some of those odd situations to feel comfortable spending at the 4% rule and pay my mortgage, which is a fixed unrelenting obligation for 25 years. How do you think about that? In calculating a fire number, you know.

[Mindy Jensen]

I did not calculate my next fire number with this, the current mortgage that I have. At the time that we were calculating our fire number at 1 million, we bumped it back to 1,120,000, which was what we had left on our mortgage at the time. So by that mentality, I would have my current fire number be 2,300,000. Then I've got the 2,000,000 that I can live off of, and I've got the 300,000 that I can choose to pay off my mortgage. I can make payments because it's such a low interest rate, and it had been the last time, too. I don't. You don't think about that as I need, you know, $350,000, because at any time, I could just pay off my mortgage.

[Scott Trench]

This is weird mortgage math. I don't think it's necessarily the right move or not to pay off a mortgage or not in one of these old situations. It's a personal choice item for folks that are at this point in their wealth journey and on the verge of fire. But, yeah, I think that that's a very reasonable way to think about it. If it's in your fire portfolio and you have a truly diversified, not true, just 100% stock portfolio, but something that does include bonds or alternatives or those types of things, then yeah, you could just assume that that's all part of your fire portfolio and you're gonna be able to cover the expenses that you need to pay for, which include your home mortgage payment, your 1500 bucks there. So as long as the cash flow from the distributions from your portfolio at 4% or after cash flow covers that mortgage payment, you're still fire. But it can be easier in a lot of cases because of the weird math of fire that just pay off that mortgage, even if it is lower interest.

[Mindy Jensen]

Yep, that's a conscious decision that Carl and I decided not to pay off the mortgage.

[Scott Trench]

Awesome. Let me ask you one more kind of tricky one here in the fire number calculation. I talked to somebody recently who was giving a significant amount of money every month to adult children, which is not uncommon, by the way. It's not talked about a lot, but it's not uncommon, especially for folks who have adult children and are tuning in to shows like biggerpockets. Money with a net worth into the millions. How do we think about those types of gifts in the context of a fire number expense? Are they just taken out every month or are they more flexible, do you think?

[Mindy Jensen]

When you say gift, do you mean That I am gifting some money to my adult children because I have more than I need or am I giving them money to help them live?

[Scott Trench]

Both.

[Mindy Jensen]

If I was gifting, if I happen to have some extra money, I'm going to give it to my kid. That is just a random expense that I don't think needs to be calculated into your fine number because it's a, a whenever I feel like it. Money exchange. If I was actually supporting my adult children for whatever reason, I would want to add that into my fine number because if I'm supporting them now, chances are really good I will be supporting them long term. If I'm just supporting them through college like I've got a kid that's going to be in college, that is just going to be an expense over the next four years.

[Scott Trench]

The problem with the FIRE calculation is again, the lower your fixed expenses, the lower the overall expenses is the ceiling that you can put in your spending and feel comfortable about spending, the easier it is to solve the fire equation. And so a fixed unrelenting obligation is our enemy in the world of fire. Right. Like that mortgage payment results in that funky math. Right. Because to be sure that your FIRE portfolio is going to cover your mortgage payment, you need a lot more than what the mortgage balance is even with those lower interest rate payments. That's our challenge here. And so when I talked over this issue with this individual, I suggested, hey, there needs to be a way to reframe this gift as an expectation that is relentless and ongoing. In the perpetual future, is there a way to think about buying out that gift? Right. I give you more upfront now then I will give as I choose at more infrequent intervals when the market performs well, for example, over time, for example. Those are real risks to a portfolio with those fixed obligations. So I would just encourage folks that have something like that. A discretionary but not really expensive expense that's coming out. Is there a way to buy out the fixed obligation component of it in a way that is amicable to other parties? Because that will give you a lot more flexibility in your. In the rest of your portfolio. Those are three edge cases that I think are pretty interesting. The home mortgage payment, the I sort of have to do it, but don't really ongoing gifts, whether that's to a family member, which I think is very challenging conversation or charitable giving.

[Mindy Jensen]

Yeah. And charitable giving is I think a different animal. That is something that you are choosing to do of your own volition and you are doing this as something that you want to do so therefore, I am going to make room in my budget to do this and to make room in your budget after retirement is to have a larger fine number. Okay, Scott, we've been talking about calculating your fine number. We've been talking about all the different things that go into your fine number. I'm not sure if you remember it's been a hundred years since we've done a Finance Friday episode, but we have a document that we send to anybody who was thinking about being on our Finance Friday episode that gives you. It's like a financial overview. It asks you questions. You know, fill in the blank here, here, here. For different places where you might not be thinking, oh, this is actually part of my fine number. This is part of my net worth. This is how I should figure this out. So I would love to invite anybody who is thinking, I really want to figure out what is my net worth, what is my fine number. Here's my expenses, et cetera, et cetera, to go to our website and download this document. Our website is bigger pocket. It's money.com and this is the financial overview document.

[Scott Trench]

Yeah, absolutely. And all this is is a personal financial statement. So if you have a personal financial statement, you don't need to do this exercise. This is just a diy. Insert the numbers, and we've made a free Excel spreadsheet that'll allow you to do this. The outputs will only be as good as the inputs that you put in. So you got to know your numbers and actually put them together, and we see the whole gamut here. We see folks that have everything getting nailed down to the T with decimal points for their spending. We have see folks who round kind of crazily way under, very rarely over on their expense categories. But the better you do at this exercise, the more confident you'll be in what you need. Your fire number.

[Mindy Jensen]

Awesome. Okay, Scott, I think this was a super fun conversation, but I am ready to go recalculate my fine number. How about you?

[Scott Trench]

Me too. Let's do it.

[Mindy Jensen]

All right. That wraps up this episode of the Bigger Pockets money podcast. He is Scott Trany Inch. I am Mindy Jensen saying, see a zebra.