A Simple Formula for Financial Independence

This post first appeared two years ago here at Frugal Dad-back when there were far less people to see it. I thought I’d run it again to breathe new life into the concept of the “multiple-by-25 rule.”

I do my best to avoid complicated mathematical formulas. In my experience, mathematicians do a great job of taking a relatively simple process and making it overly complex by applying a series of inexplicable formulas. I guess that’s why I was happy to run across an interesting concept the other day called “the multiply-by-25 rule.”

The idea is that you can estimate how much is needed in savings to generate enough income to pay for an item. The only factors you need to know are how much something costs you now, and at what interest rate your money will grow.

Of course, determining both in this period of a inflation and fluctuating interest rates is tough, but you can get a general idea of how the math works by looking at a real-life example.

A Working Example

We are fans of Netflix because it offers a relatively frugal entertainment option for family movie nights. It’s cheaper than going to the theater, and cheaper than an expanded cable package. At roughly $9 a month, our Netflix membership sets us back $108 per year.

To continue paying for Netflix out of passive income earning 4% per year, I would need a $2,700 ($108×25) savings balance. Since most of my savings are now earning closer to 3% I would need to multiply my costs by a factor of 33.33% (100/interest rate).

This increases the amount needed to pay for Netflix after reaching financial independence by $900 to $3,600. Maybe I should just cancel Netflix!

A Bigger Example

I have heard stories of people paying off their homes, cars and all other debts and living quite comfortable on a couple thousand dollars a month, or less. Assuming our goal is the high end of that estimate, how much of a savings balance would be required to spin off $24,000 a year in income?

If earning:
3% interest, you would need $800,000
4% interest, you would need $600,000
5% interest, you would need $480,000

And you thought you needed to be a millionaire to retire early! This exercise does fail to account for inflation, both in terms of cheapening dollars and the costs of goods and services over time. I doubt Netflix, or a similar company, will continue to offer one-at-a-time unlimited rentals in the year 2030 for $9. However, running these numbers does emphasize the importance of minimizing the number of expenses you commit to early on.

Our Netflix membership alone puts us $3,600 further away from financial independence. Our cable bill, although relatively small at $12/month, puts us $4,800 away from retiring early. When you start to convert monthly expenditures to the amount of money required to cover their upkeep it really helps you prioritize what is important in your budget.

Homework:  Apply this formula to some recurring expense in your current budget and report the results in the comments below.  Does this required savings amount change the way you feel about continuing to pay for the item?


  1. I’ve been using the Multiply-by-25 Rule since the late 1990s, when we used to explore its implications regularly in threads at the Motley Fool’s Retire Early board. It is very simple but amazingly powerful.

    I used it to go through every line of my budget and identify possible places to cut. There’s not much motivation to cut $100 out of your monthly budget because $100 does not sound like that much. But $100 monthly is $1200 annually. And when you multiply $1200 by 25 you get $30,000. That’s how much less you need to save to attain financial independence now that you have cut your monthly budget by $100.

    The next step is to translate the $30,000 reduction in what you need to achieve financial independence by the number of months or years it takes you to save that amount of money. If you save $10,000 per year, you have just reduced the amount of time it will take you to achieve financial independence by three years! With a $100 cut in spending!

    It’s not hard for most people to find $100 in spending cuts. My wife and I were able to get cuts of larger than that amount just by not eating out so often. The leverage gained through use of this tool is amazing in the early days of a frugality effort. After you have made a lot of cuts, the payoff is not as great because there is no longer so much low-hanging fruit. But the tool still helps you to make the true cost of overspending concrete in your mind.


  2. Wow, this exercise was painful and enlightening. I decided to use it for our biggest nonessential monthly expense – eating out. As you can imagine, it was quite a bit higher than Netflix.

    We hover about $125/month eating out. That’s $1,500/year which becomes $37,500. Ouch. Much more than I thought, but it’s a bit of a motivator to get to work now and save up for that expense.

    Thanks for giving me some food for thought. Time to see what else I need to save up for…..

  3. This is a very helpful exercise! My husband and I are still in our 40s and have no intentions of retiring anytime soon, however, we are looking to downshift in the next 2 years or so. Changing careers and going from 70K per year to around 30k per year (tired of all the stress!) This formula is good to help us figure out what we should be working on cutting out and how much it will cost us in the future.

  4. Of course this exercise is not perfect, like any rule of thumb, but it is great to use for expenses that you plan to keep once you reach financial independence. I work with money and it makes dollars seem less powerful to me. $500 doesn’t seem like a lot, for example. Magnifying it this way helps. My husband and I spend $500 a month on spending money and your exercise has really got me thinking if it is worth $150K in savings to keep up that level of spending.

    For one-time expenses I like to calculate how many of my work hours it takes to pay for the item. That really makes me stop and think if it is worth it.

  5. Remember to keep in mind the multiply by 25 rule assumes a 4% _real_ return (i.e. after taxes, etc.). When using pre-tax investment return percentages, I usually multiply by 40 or 50 instead of 25.

    • Good point. It also assumes you don’t plan to draw down your savings, but rather live off the real, after-tax return to sustain the same level of spending. That’s probably not how most of us will live in retirement, as we’ll likely have to draw down a bit of savings each year to cover expenses.

  6. “Our Netflix membership alone puts us $3,600 further away from financial independence.”

    Well, that’s one way of looking at it. One. Way.

    To me, this sort of valuation, with THIS example, is taking things to an extreme and one that really makes little “sense.”

    This is your $ number for what it costs you. How about the $ number for what it saves you?

    Let’s use our family and a hypothetical. Family of 4 (two adults, two kids over 12). Goes to movies 1X a month. Factor in transportation, as well as movie tickets ($12 to $13 each, let’s say $12.50) . This equals $50 for tickets and $18 for transportation (public transport). No food costs as we would bring with us (if we went). If we factored in ANY costs, you could easily get $30 and up per visit.

    Cost for ONE movie out per month: $68. X 12 months = $816 a year.
    Cost of one year of Netflix? $119.

    We’re saving, at a bare minimum, a bit less than $700 a year by using netflix. To me, THAT is $700 (and up, because most families may go every other week to a movie) closer to our savings goal.

    So, that is OUR math on savings.

    That $9+tax a month = one family movie nite at home per week, one friends movie nite at home per week + something like 8 to 10 (or more) viewings of individual movies (Streaming) or DVDs per month. The cost of that in a movie would be many times over $816.

    Numbers. You can play them lots of ways. But there is more than one limited way of looking at them.

    Oh. Yeah. Having netflix and watching free stuff online (on TV via HDMI connection) means we can pay for basic cable only–we can’t get anything with an antennae–so there are even more savings involved. Something like $60 a month. $720 a year. That’s a total of about $1,400 a year in SAVINGS per year.

  7. Sarah- I was thinking of investing in Netflix- but you have convinced me:>)

    We did the same 4% exercise last month. Since we have been retired for a quarter- it was easy to look at it realistically for us. We found that our nest egg was sufficient for all of essentials (food, shelter, taxes, insurance….) It was not large enough for extras. We do have pensions. We do not use our nest egg yet, but it was a good to know we could survive if pensions fell apart. We could get much leaner if we needed to.

  8. While this can work as a tool to evaluate some choices particularly with respect to lower cost repetative ones, I tend to agree with saraA in that you have to be conscious of your choices and trade offs and evaluate things in that light. Your statement of “cancelling netflix” because of the future opportunity costs negates the bolded statement you made and ignores any benefits you’re getting from it as choice now, that or maybe it was just me and I didn’t get the sarcasm.

    On the flip side I think it’s important to step back as you did in the bigger example and just figuring what you can live with and use that number to gain some perspective. And as you mentioned, that’s assuming you aren’t eating into principal on the money, allow for that and you can spend a lot more. For example, using the 800,000 value and 3% interest earned and 50 years, you could take out $31,000 a year. We’d all like to think we’ll live forever, but if you plan on retiring at 65, what are the real odds you’ll make it to 115. Also when your kids are 85, grandkids are 55, and great grandkids are 25, they shouldn’t be needing to rely on you to leave anything for them.

  9. You’re on the right track as to how to determine the real effect of living expenses. But there is a better method which involves some time-value-of-money math. To simplify, take this year’s $108 cost for Netflix and instead assume that you invest it at 3% pa over a 40 year period. The future value of that $108 comes to approx $352. If can get a higher return of say 15% pa (which is roughly what you can expect as the long term average return on some good stocks), the future value comes to approx $28,929. That’s an eye-popping figure, isn’t it?

  10. I love the way Sarah put it; this formula could be used on figuring out how much you’re SAVING. I spend a little more on Netflix (Blu-Ray) so I may be dishing out a couple more dollars, but it does help me prioritize my wants.

  11. I’ve been using this method for a while now to predict how much I’ll need to support the amount I think I’ll need in retirement. I calculate it using the x25 and also x35 to get a “safer” number. Right now my savings are between the two. So if x25 is really enough I’ve saved for my retirement needs from 65 onward when my savings in combination with a small pension and government benefits (not a pie in the sky dream here in Canada) will combine to provide what I need.

    Now my focus is strictly on saving enought to support our lives before 65. We’re 47 and 50 and aiming at retiring in December 2020 (10yrs). Using the x25 calculation makes if very easy to skip the non essentials because every one we leave in the budget means working that many more years/months/weeks/days… When you have a very definite line in the sand, and want to move up that early retirement date, it certainly gives you motivation to re-examine even the most innocent looking little expenses.

  12. yeah, the little things are really adding up, so netflix or not might be a really tough decision.
    Regarding the calculators that allow to decide how much these are adding up, there are some nice ones existing around the net. Personally, I like ficalculator.org quite a lot to calculate my financial independence age and development, as it nicely visualizes the progress. However, other such calculators exist as well.