Dr. Paul Borosky, DBA, MBA
Business Consultant & Author
How to Calculate Your Financial Independence Number (Step by Step)
A real number beats a guess. Dr. Paul Borosky walks the calculation from the life you want to an invested-assets target, then draws three lines so you can tell safe from comfortable from free. It is an educational method, not advice.
Last Updated: 10/28/2026 · Written by Dr. Paul Borosky, DBA, MBA
The Short Answer
How Do You Calculate Your Financial Independence Number?
Estimate the annual after-tax cost of the life you want, subtract the income you can rely on, and divide the remaining gap by a planning withdrawal rate. A $40,000 gap at a 4 percent rate points to about $1 million. Treat the result as a range to refine with a professional.
This is the calculation from Chapter 6 of Become Your Version of Rich by Dr. Paul Borosky, DBA, MBA. It is the last rung, and it answers the question the whole book asks: how much is enough? Set the goal first with SMART goals. Watch the mistake it prevents in how MC Hammer went broke. Everything sits inside the Become Your Version of Rich guide.
The Method
Eight Steps From Life to Number
Work through them in order. The first step changes the answer more than the last.
- Start with the life. Decide what your days look like. Do you want to stop working entirely, or to keep doing work you love on your own terms? The two answers give very different numbers.
- Estimate the annual cost, in today’s dollars. Include health care and insurance, repairs, taxes, family support, travel, giving, and a cushion for irregular costs. Revisit it each year for inflation.
- Translate it into after-tax cash. What reaches your household after taxes is the figure that matters. You will need a larger gross number to produce it.
- Subtract the income you can rely on. Part-time work, business distributions, a pension, Social Security, rental income. What remains is the annual gap.
- Turn the gap into an invested-assets target. Divide the gap by a planning withdrawal rate. Some planners start around 4 percent.
- Set reserves and a debt target. Keep personal and business reserves separate. Decide which debts must go, judged by rate, payment, and peace of mind.
- Draw three lines. Minimum security, comfortable, and abundant. A range keeps you off the treadmill.
- Pressure-test it. Ask what happens if markets fall 20 percent, revenue drops a quarter, inflation stays high, or a big health cost lands.
A Fictional Example
The Number Is Never Just One Million Dollars
Here is the shape of a finished answer. The person is invented. The arithmetic is real.
The book offers this as one fictional illustration, not a real client. Add six months of personal expenses in cash, no high-rate debt, no more than thirty working hours a week, and four weeks off a year, and you have a specific life you would recognize the moment you were living it.
Dr. Paul closes the example this way in Become Your Version of Rich.
From Chapter 6 of Become Your Version of Rich
A million by itself is only the invested-assets line. The real answer is the whole set together, the spending and the income and the gap and the debt and the reserve and the time, which describes a specific life you would recognize the moment you were living it.
Why the Rate Matters
Change the Rate and the Number Moves
The same gap gives three different targets. That is why this is an estimate, not a promise.
A more cautious rate
3.5 percent
$40,000 divided by 0.035 is about $1.14 million.
Ask yourself: What would a lower rate cost me in extra savings?
The common starting point
4 percent
$40,000 divided by 0.04 is $1 million.
Ask yourself: Is this rate right for my age and time horizon?
A more aggressive rate
5 percent
$40,000 divided by 0.05 is $800,000, with less margin for a bad stretch.
Ask yourself: What happens if markets fall early?
These figures are simple arithmetic on the example, not advice. William Bengen’s 1994 study of historical U.S. returns is the usual source of the 4 percent idea. He reported that a 4 percent first-year withdrawal, raised for inflation each year, had not exhausted a portfolio before 33 years in any past case he tested. That is history, not a guarantee. The right rate depends on your age, time horizon, investment mix, taxes, inflation, and how flexible you can be.
Sources: Bengen, W. P. (1994), Determining Withdrawal Rates Using Historical Data, Journal of Financial Planning. Cooley, P. L., Hubbard, C. M., & Walz, D. T. (1998), Retirement savings: Choosing a withdrawal rate that is sustainable, AAII Journal, 20(2), 16-21.
The Three Lines
Safe, Comfortable, and Free Are Different Numbers
Line one
Minimum security
Core expenses covered, an emergency reserve funded, and the dangerous debt gone.
Line three
Abundant
Extra travel, giving, family support, and optional luxuries.
The three lines give you flexibility without dragging you back onto the treadmill. Pressure-testing matters too. Do not declare victory the first day your assets touch the target. Arrival is durable when your assets hold above the line through a reasonable downside, your reserves and insurance are adequate, and you have actually tested the life.
What the Research Says
Why Defining Enough Matters
Psychologists Philip Brickman, Dan Coates, and Ronnie Janoff-Bulman reported in 1978 that people tend to adapt to improved circumstances, which helps explain why a target defined as “more” keeps moving. The finding is more nuanced than “everyone returns to where they started,” but it is sturdy enough to build on. Read the full idea in hedonic treadmill.
Thomas Stanley and William Danko’s The Millionaire Next Door found that many affluent households built wealth through sustained saving and restrained spending, not through looking rich. Their sample dates from the 1990s, so treat it as a case, not a law. Elizabeth Dunn and colleagues found in 2008 that spending money on others can add to your own well-being, which is one use of what spills over the top.
Sources: Brickman, P., Coates, D., & Janoff-Bulman, R. (1978), Lottery winners and accident victims: Is happiness relative?, Journal of Personality and Social Psychology, 36(8), 917-927. Stanley, T. J., & Danko, W. D. (1996), The Millionaire Next Door, Longstreet Press. Dunn, E. W., Aknin, L. B., & Norton, M. I. (2008), Spending money on others promotes happiness, Science, 319(5870), 1687-1688.
How This Helps a Business Student
Use the Method in Class and in Your Own Plan
Personal finance courses give you the formula. This method gives you the steps before it.
On the Exam
State the formula, then the caveats
Write: annual after-tax need minus reliable income equals the gap, and the gap divided by a withdrawal rate gives the target. Then add the caveats: the rate is an estimate, inflation matters, and the answer is a range.
In a Case Study
Rebuild the example with new numbers
Change the spending, the income, or the rate and recompute. Then ask which assumption the answer is most sensitive to. Compare it with MC Hammer’s fixed costs.
In Your Own Budget
Write the first draft this week
Estimate one year of costs in today’s dollars and one year of reliable income. Subtract. The gap is your first real number.
One Honest Caution
Educational Method, Not Financial Advice
This is a planning method for education, not investment, tax, or retirement advice. The 4 percent figure is a much-debated rule of thumb based on past U.S. data, and it does not guarantee future results. Aim for a range, not one magic figure, and run your specifics past a qualified professional before you make real decisions.
Do This Tomorrow
Three Steps for This Week
- Write the first draft of your version of rich: the work, the time, the home, the freedom, specific enough to recognize.
- Gather your real numbers: spending, debts, income, and assets.
- Draft your three lines, then pick a date to review them.
A draft takes about twenty minutes. The real figures take longer. If you only do one thing, write the first draft. Then see what happens when a fortune has no defined number in how Antoine Walker went broke.
The Book
Chapter 6 Is the Destination
This page covers the calculation. Become Your Version of Rich gives you the stories of people who arrived and people who never did.
- The five-step method for defining your version of rich
- Milton Hershey and Benjamin Franklin, two people who defined enough and reached it
- Napoleon on St. Helena and what he never defined
- The MC Hammer cautionary tale
- Daily Actions and a 30-day way to know it is working
Go Further With Dr. Paul
Put Your Numbers Into a Financial Model
A number on a page is a start. Dr. Paul’s industry-specific business plan templates give you a formatted Word plan and an Excel financial model, so you can see how business income feeds your personal gap. Built on 1,000+ client engagements.
Keep Going
More From Chapter 6
FAQ
Common Questions About Your Financial Independence Number
How do you calculate your financial independence number?
What is the 4 percent rule?
Is your number just the invested-assets figure?
Dr. Paul Borosky, DBA, MBA
Business Consultant, Author & Educator | 14+ Years | 1,000+ Clients Served
Dr. Paul Borosky, DBA, MBA is a business consultant, author, and educator, and the founder of Quality Business Plan. He helps small business owners across the United States and Canada with business planning, financial modeling, fractional CFO services, and the everyday problems of businesses that depend too much on their owners. He is the creator of Dr. Paul’s Organize-Plan-Grow™ Strategy, author of numerous published books on Amazon, and publisher of over 1,000 business-focused videos on YouTube. He has taught as an adjunct college instructor and teaches in Florida public schools.
This page is for general educational purposes only. It is not investment, tax, legal, financial, or retirement advice, and it does not guarantee any particular financial result. The examples, figures, and calculations are illustrative planning tools, not recommendations. Before making significant financial decisions, consult a qualified professional.