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By Michael Yardney

7 numbers you need to know if you’re wanting to become financially independent

There are so many things we all need to achieve to become financially successful and it can be difficult trying to keep on top of it all.

When you first start looking at property investment, share investing, and wealth creation in general is him to be an overwhelming number of things to get your head around.

However, the good news is the most important things you need to know about your personal finances can be summed up in a few simple numbers.

And by knowing these numbers you can track your wealth journey, make sure you’re on target to become financially independent and it can help you plan how to get there.

So, here are 7 key numbers you need to know about your personal finances, and how to calculate them.

Personal Wealth

1. Your wealth window

One of the first personal finance numbers you need to know is how many months until you want to develop financial independence.

This is what I call your ‘wealth window’.

Given the choice, we’d all like to stop working when we’re good and ready.

Or even work only because we want to, not because we have to.

So in order to plan for this, it's vital to know how many months or years you want, or have, to wait until you can stop working.

Once you know how much time you have left before reaching your goal of financial independence, you’ll know how long you have for your investments to grow sufficiently to be able to either replace or contribute to your personal income.

How to calculate your wealth window:

  • Decide when you plan to gain financial independence.
  • Calculate how much time between now and then.
  • That gives you your wealth window.

2. Your current net worth

You need to know where you’re at now along your wealth journey which means you need to calculate your net worth.

Start by adding up the value of everything you own.

Things like your savings accounts, cars, investments, any equity in a business, valuable items around your home, and also, obviously, even your property itself.

While doing this it’s also very important to note how much of your investment is invested in appreciating assets like real estate.

And how much of your money is tied up in depreciating assets such as a car or computer or any other high-value items that will only decline in value?

Remember, your returns will come from investing in or owning assets that appreciate in value, so this is where you want to ensure you invest your money.

Next, find out the amount you owe on each of your debts and add them up. The total number equals your total liabilities.

This is everything from your home loan to personal loans, car loans, student loans, credit card balances, business loans, and any other type of debt you might have.

It might be a painful process to add these all up but how do you improve on your financial position if you don’t know what position you’re currently in?

It’s important to remember here that not all debt is 'bad debt’.

‘Bad debt’ refers to where you’ve put money into something that is going to depreciate in value – such as cars and doodahs.

On the other hand, good debt can improve your financial position because you’re using it to buy appreciating assets like residential real estate.

How to calculate your net worth:

  • Take the value of all the things you own that have any value, and add them up. This equals your total assets.
  • Find out the amount you owe on each of your debts and add them up. The total number equals your total liabilities.
  • Subtract your liabilities from your assets and that’s your net worth

3. Your debt-to-income ratio

Apart from understanding what you have in terms of assets and liabilities, it’s important to figure out your debt-to-income ratio.

This is how much you owe relative to your income.

It’s vital to know this because it shows you how much debt you have versus how much income you’re bringing in.

It is also an influencing factor when you apply for a home loan because many lenders want to see a lower debt-to-income ratio to be satisfied that you’re not overstretching yourself.

But as a general rule of thumb, a debt/income ratio of 10% or less is outstanding.

If it's between 10 to 20%, your credit is good, and you can probably borrow more.

But once you hit 20% or above it's time to take a serious look at your debt load.

How to calculate your debt-to-income ratio:

  • Divide your total monthly debt payments by your income.


4. Your rate of savings

Every dollar from your monthly wage that you are able to put aside into savings is another dollar you are investing into yourself and your future.

So how much of your net income are you using to invest in your future self?

The rule of thumb is that we should all be saving 15-20% of everything we earn.

Because the reality is, that the more disciplined you are, the more you can save, the more you can invest and therefore the sooner you will be able to retire.

I’ve found you need to do the hard things now so that you have an easier life later, however, most people do the easy things now and have a hard life later.

But most people don’t learn to delay gratification, spend less than they earn, save invest and keep re-investing till they have a substantial asset base.

That’s the trick: Spend less than you earn, save and invest and earn some more of your investment.

It’s a no-brainer.

How to calculate your rate of savings:

  • Take the amount you save per month, divide it by your total income for the month then times by 100. This will give you the rate of savings.

5. Your financial independence value

So you understand your current financial position and you know when you want to become financially independent, and how much time you have left in your wealth window, but do you know how much money you need when that time comes?

It’s worth thinking about how big your required asset bases will be right now.

How much do you need in property, shares, and superannuation to be able to provide the income you require to give you the type of lifestyle you want to live?

How much are you short?

How much do you need to add to your asset base in the remainder of your wealth window to be able to achieve this goal?

Once you’ve worked out how much you’ll need per year to live the life you want, you can easily work out how to get to that number.

How to calculate your independence value:

  • Calculate your expected monthly outgoings for when you reach that period of your life. That’s your big number.
  • Minus any investment income, you may have access to at the time and that gives you the shortfall you need to make up between now and then.

6. Your health disaster fund sum

How much have you put aside for a health disaster?

If something happens tomorrow, are your finances protected or insured?

It doesn't matter whether or not you have children or other dependents – if illness would mean you couldn't pay the bills, you should consider income protection insurance.

But you're most likely to need it if you're self-employed or employed and you don't have sick pay to fall back on.

With average monthly premiums in the hundreds, it’s easy to see why Australians don’t want to pay for, or even claim on, income protection insurance.

But it's a critical part of structuring and protecting your wealth creation for the long term.

How to calculate your health disaster fund:

  • Calculate how much money you’d need to live on a monthly basis if you were incapacitated tomorrow and unable to earn your usual income.

Cup Of Coffee Near Laptop With Credit Score Letter

7. Your credit score

It’s vital that everyone checks their credit score at least once per year.

As a reflection of your past financial decisions, like your ability to pay bills on time, and how much debt you have in your name, it's a very important tool to show you how easy it’ll be for you to make future financial decisions like buying a home or investment property.

Banks want to see a high credit score and will reward those who have it with the best rates.

If you have a bad credit score it can make things much more difficult, and costly, in the long run.

You also want to look at your credit report to make sure nothing seems out of place.

It’s a great way to discover fraudulent accounts in your name or pick up on mistakes that could have been made by companies with which you have loans.

It’s been said there are only two types of people…

Those who outlive their money and those who don't.

Of course, everyone wants to be in the latter group, but most Australians don’t fall into that category.

However, those who do develop financial independence tend to live their lives by design – they know the financial goals, they know what they want to achieve and by when, and then by understanding their financial numbers they do what they have to do to get there.

The longer your time frame between now and when you want to leave the rat race the easier it is going to be for you to build a substantial asset base to provide retirement income you can’t outlive.

Now that you understand these financial numbers, you’re starting to understand what you need to do to become financially free and enjoy your golden years.

About Michael Yardney Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and one of Australia's 50 most influential Thought Leaders. His opinions are regularly featured in the media.

Hi Michael, For some of the calculations are we using gross income or net income after tax? Regards, Alex

1 reply


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