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The 4% Rule: What Is It and Why It Matters

A popular rule of thumb for financial planners and bloggers is the 4% rule. This rule states that a diversified portfolio of stocks and bonds will allow investors to withdraw 4% of their portfolio every year without any risk of running out of money. For people trying to find out what their target retirement number is, this can be a very simple, valuable tool. Simply take the amount of income you would need annually to retire (before taxes), and divide it by 4% (or multiply by 25, they equal the same thing).

Spending in Year 1 of Retirement / 4% = My Portfolio Retirement Number read more

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Your Savings Rate and Your Net Worth

Your savings rate, or how much of your income goes into savings and investing, is an incredibly powerful barometer for how well you are doing at growing your net worth and achieving your early retirement goals. In The Basic Equation that Governs Your Financial Life, I wrote out the formula I use to assess how I am doing on my journey towards financial independence and early retirement. In this article, I am going to look at the savings portion of the formula, and evaluate my own performance.

The first part of the equation is known as your savings rate, and it can have a HUGE impact on your journey towards financial independence. To find your savings rate, subtract your taxes and expenses from your income, and divide that by your pre-tax income. read more

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The Basic Equation that Governs Your Financial Life

Building your net worth has a lot of moving parts. Savings, earning, investing, taxes. Sometimes it’s hard to know where to start and how all the pieces work together. To help, I developed a simplified equation to provide a framework for thinking about your personal finances. Thinking about your finances in this way can provide a powerful starting point for jumpstarting your journey to financial independence and early retirement.

Net Worth Equation: read more

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The Emergency Fund: Insurance for your Financial Life

I don’t think any personal finance blog, advice column, or book is complete without a post on the emergency fund. Articles and advice can range dramatically, from $400 to 12-months of spending. It is amazing how many people in the US couldn’t cover an unexpected $400 expense.

It can be difficult to know what the “right” amount to have in an emergency fund is (or if you need one at all), but there are several factors that you should consider when setting your savings target. read more

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