Quick Tip: Work out your minimum investment target while in Lockdown

As we are coming to an end of our nation lockdown, most of us got a unique opportunity to find out roughly what will our minimum investment amount to achieve financial freedom would be. Also known as our minimum FIRE figure or LeanFIRE number.

How to work it out?

So here is the quick and dirty way to do it: Add up your household expense (ignore mortgage payment) from 26 March to 22 April (4 weeks), multiply by 13, then multiply by 25, that will be your rough target.

[4 weeks of basic living expense] x 13 x 25

If you use EFTPOS and credit card, you can easily export those data from your banking app.

Example:

Here is the household spending for Eric’s household during those 4 weeks lockdown

 

Supermarket                         $1056.76

Mortgage (ignored)              $2400                        

Power and Gas                      $283.25

Water                                     $73.05

Internet and Phone              $84.99

Health insurance                   $190.55

House insurance                   $109.28

Car insurance                         $82.52

Mobile phone                         $50

Subscription                          $29.98

Total                                        $1960.38

$1960.38 x 13 x 25 = $637.123.50

So Eric’s minimum investment target will be roughly around 637k right now.

Your basic living expenses

The logic behind this calculation is due to Covid19 lockdown, most of us should be staying home during those 4 weeks and only go out for essential service (like a supermarket). There should be no going out for dinner, grabbing coffee with friends, going to movies, buying lunch at work or any extra activities.

Your Lockdown Lifestyle

You were basically living like a retired person who is not going out for 4 weeks. So what you’ve spent in those 4 weeks should be your basic living expense (or somewhat close to it.)

We took those 4 weeks basic expenses, multiply by 13, that will be your basic living expense for 52 weeks, a full year.

The Multiply By 25 Rule

In personal finance, the Multiply by 25 Rule estimates how much money you’ll need in retirement by multiplying your desired annual income by 25.

The reason being a long term average return on investment mix with shock and bond will generate around 7%. Meanwhile, inflation and fees tend to erode the value of the dollar at roughly 3% per year. It means your “real return”—after inflation—will be about 4 per cent.

Your investment will last for a long time if you withdraw 4% every year as your living expense. If you live on $40,000/year, you will need an investment for $1,000,000 to withdraw that 4% on (and $1,000,000 is 25 times of $40,000).  Hence you multiply your annual expense by 25, you’ll get your investment target.

Your Minimum target

Now with the basic living spending for 4 weeks, multiply 13 to our basic living spending for 1 year. Multiply that with 25, that will be your rough minimum investment target now.

For Eric, his target 637K. Which means that in theory, if Eric is debt-free, fully pay off this housing mortgage and had investment for around 637k (or more) in place, he can stop working, retire and continue his lockdown living style (no going out, no coffee date, no travel, no shopping) for a long time. However, in reality, he will need a bit more than that.

It’s just a rough Target

There are a couple flaws of this calculation.

  • Ignored annual or quarterly expense: This quick and dirty calculation ignores the your council rate payment, WOF expenses and Rego fee, or if you pay insurance annually. Of course, you can add those back in by calculating the 4-week portion of those expenses
  • Ignore seasonal expense: This is the expense for a March/April month. Your winter energy bill will be higher. Also, people tend to spend more over special occasion like X’mas, Birthday and Anniversary.
  • Doesn’t work if you still going out for work every day: If you are an essential worker, thank you for doing your part. However, your expenses is not really a basic minimum expense. However, you can adjust it by taking out the petrol expenses.
  • That the target for right now: This target is not adjusting for inflation. If you got a nice 500K target today. You got inspired and you work hard, save hard and invest well for the next 10 years to reach that 500k. You will find out you need around 750k at the time because of inflation. To adjust your target with inflation,
    • 10 years from now, multiply by 1.48
    • 15 years from now, multiply by 1.8
    • 20 years from now, multiply by 2.19

So to sum it up, this is a quick and dirty way to work out your investment target. Especially for those who never think about retirement or finance independents, this is an easy way to have a rough idea of how much you will need at the low end. You may be surprised by the number.

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