Cover image credit: This image was generated by DALL-E, an AI model developed by OpenAI.

We all know that you need money to satisfy your needs and wants (a.k.a., “reqs”). When you can meet your reqs – now and forever – without having to work to earn income, i.e., needing active income, you’re officially considered financially independent (FI). This is, in a nutshell, the basic idea of the popular FIRE (Financial Independence, Retire Early) movement, viz., to accumulate enough money to last you forever without ever having to work for money.

But as we’ve argued in another post, there might be a danger of burning out in pursuit of FIRE. On the other hand, if you adobt the other extreme of YOLO¹ and living paycheck-to-paycheck – with the accompanying stress of how to take care of sudden unexpected emergencies – is also not a very smart choice.

Is there a better way then?

The concept of financial runway

In fact, there is a middle ground between trying to achieve FI and spending your entire paycheck. Instead of attaching a binary label of FI/not-FI to your financial state, it’s better to quantify your progression towards FI. Within the FIRE community, there is a crude measure of progress towards FI indicated by labels such as Barista FIRE, Coast FIRE, Lean FIRE, etc. While this is a slight improvement over the binary FI/not-FI label, it’s actually possible to be even more precise!

Instead of figuring out which of the FIRE labels apply to you, the more practically relevant question is the following:

If all of your income from unsustainable sources, e.g., an unfulfilling job, were to suddenly disappear tomorrow, for how long can your current financial resources sustain your current living expenses?

In other words, how long can the money you have keep you financially independent starting from today? Let’s call this duration of time your “financial runway”.

For example, you may find out that your financial runway is about a decade, which may be more than enough time for you to recharge yourself, indulge in your hobbies, develop new skills, try out some new ventures for yourself, etc. Having discovered this, you may decide to walk away from your boring day job, since you’d be able to enjoy all the above activities in the prime of your life without worrying about how you’ll meet your reqs for the next decade. From this more general point of view, FI, in the conventional sense, is simply the special case in which the financial runway may be considered infinite.

But, and this a crucial but

your financial runway doesn’t have to be infinite for you to walk away from an unsatisfying work situation – you only need it to be long enough for your own personal comfort level.

Now, since the future is uncertain, you can only estimate how much financial runway a given amount of money can provide. The amount of financial runway critically depends on future financial scenarios, e.g., market conditions, your living expenses, etc. So, it’s necessary to estimate financial runway for a range of possible financial scenarios in the future. When making any assumptions about future scenarios, it’s important to remember that it’s better to underestimate the financial runway than overestimate it².

Your financial runway depends mainly on your current your net worth, as well as your overall spending level. With the help of your budget and some basic math, you can directly compute your current financial runway for a range of financial scenarios. Then, you can craft a plan to help you create a financial runway of the desired length based on your personal comfort level.

Building your financial runway

While you’re on the journey to accumulating enough money for a desired financial runway (or FI), it can be helpful to know just how long the journey will be. Using some basic math, you can compute how long it will take you to get to the end of your journey. Like in the case of estimating your financial runway, this estimate, too, depends critically on various parameters, e.g., your current and future expenditure, your investment returns in the future, etc. So, it’s imperative to consider different financial scenarios when estimating the time needed to accumulate what’s enough money for you. When making such estimates, again it’s better to overestimate the time-frame than underestimate it².

An additional benefit of determining the time needed to accumulate enough money is that it can foster awareness in you regarding your consumption patterns. In particular, you may find that even if you choose eco-friendly utilities, which tend to be better not just for the planet but also your own well-being³, instead of the cheaper conventional ones, the impact on your financial runway accumulation time is minimal.

Seen from the perspective of your financial runway (as opposed to merely the sticker price), you may actually realize that choosing eco-friendly utilities isn’t just for the rich and elite, but very much within the reach of everyday consumers like you and us.

Furthermore, determining your financial runway accumulation time can also help you evaluate the impact of important choices such as taking up a new (maybe more demanding) job for higher pay, or moving to a different area for lowering your living expenses on this accumulation time-frame. This would allow you to make more informed decisions, e.g., whether a particular job is giving you enough in return for your time, or where⁴ can you best spend your time at present.

Seen from this perspective, taking stock of your personal finances using some basic math and budgeting, can be a critically useful tool in informing important life decisions that may have very far-reaching consequences.