# How much cash do you need to be financially independent?

Financial independence (FI) can be defined as the point at which the passive income from your investments exceeds your monthly expenses. At this point, you don’t need to actively work to pay your bills. You only go to work for other reasons other than survival.

So how can you determine how much cash you need to be financially independent? The starting point is establishing your average monthly expenditure for your lifestyle. Now, different people have different standards of living, so everyone will have a different level of expenditure. For example, someone may be able to live comfortably on ugx 2m while another will require say ugx 10m. For this example, we shall assume that you need about ugx 5m per month to live reasonably well, pay the bills, send the kids to a fair school, live in a decent place, drive a reasonable car, and maintain a small family.

The question now becomes, how much do you need to be invested to generate an income of ugx 5m per month. To answer this question we need to do some simple mathematics. Bear with me if mathematics is not your cup of tea. A monthly income of ugx 5m every month translates into ugx 60m (multiply 5m by 12 months) per year. If we assume that all this cash is coming from a simple unit trust which pays on average 10% in interest we can estimate the principal amount to be about ugx 600m (simply divide the 60m by 0.1 or 10%). So you need to save and invest ugx 600m to be able to achieve financial independence if your standard of living can fit within ugx 5m per month. This figure will of course depend on many factors. For example, if you choose to buy treasury bonds yielding an average of 15% you will need ugx 400m (60m divided by 0.15). There are other complexities like inflation rate, asset mix, variable returns, risk, investment horizon, etc. which we shall simply ignore for now.

So the easy rule of thumb to estimate your financial independence (FI) target is to simply divide your annual expenditure by 0.1 (which is 10%). If you need ugx 100m per year in income to feel secure then you must save and invest ugx 1bn (100m divided by 0.1).

We can compute different levels of Financial Independence (FI). At level 1 things are simply tight and you are struggling to pay bills. Level 2; you’re living hand to mouth and hardly have any savings. Level 3; you establish some savings to last you at least 3+ months. Level 4; you get a handle on debt and are no longer running from money lenders. If you have debt, you have more than enough monthly income to pay off the monthly installments comfortably. At level 5 you have some security of accommodation and basic needs like food, medicare, etc. At this level, you won’t find yourself homeless and starving even if you lose your job! Level 6 is financial independence and your passive income can meet all your basic bills. Level 7 is abundance. You have more income than you need. You are giving more. You’re pursuing your passions and interests. You are doing work you love. Ultimately we should all strive to achieve financial abundance.

Enough of the mathematics! Whatever figure you come up with should not scare you. It is just an estimate. The important point is to save and invest a portion of your monthly income in simple and safe assets over a long period of time. If you dedicate the next decade of your working life you will be utterly shocked by how fast you come close to or exceed your Financial Independence (FI) number!

So what is your FI number?