This is the question almost everyone gets wrong — not because they're bad at math, but because nobody ever gave them a clear framework. "Save more" isn't advice. "Spend less than you earn" is barely advice. What you actually need is a formula that respects both your future and your present. Because here's something I believe strongly:
One thing I dislike about parts of the early retirement movement is extreme delayed gratification. You deserve to enjoy your working life now, not defer all enjoyment until retirement. The goal isn't to suffer today so you can maybe enjoy tomorrow. The goal is to build a life you don't need to escape from — while still taking care of your future self.
So how do we balance enjoying life today with building real wealth for the future? There's a formula I use that wasn't created by me, but it's the best spending rule I've seen for building toward financial independence. It was created by Money with Katie, and the idea is elegant: live not only within your means, but within your assets.
The Formula: Live Within Your Assets
Most people say "spend less than you earn," which is technically correct, but practically useless. Spending $97,000 when you make $100,000 after tax isn't going to get you very far. And for diligent savers who get a raise, it can be confusing to know whether increasing your spending is actually responsible or not.
The real test isn't just your income — it's whether your assets justify your spending. Here's the rule:
The Spending Target Formula
Your reasonable annual spending target should be the average of 4% of your current invested assets and your after-tax income.
This anchors your lifestyle to your actual financial position — not just your paycheck. As your wealth grows, you can spend a little more. But it keeps you honest when you're just starting out.
A Real-World Example
Let's say you have $200,000 in investable assets and earn $160,000 in after-tax income. Here's how the formula works:
$8,000 + $160,000 = $168,000
$168,000 ÷ 2 = $84,000 per year
With $160,000 in after-tax income and $84,000 in spending, you save $76,000 annually. If your pre-tax income was $200,000, that's a 38% savings rate — which is high, but exactly what gets you to financial independence fast.
The assets in this formula should be investable or liquid net worth — money that can generate income for you in retirement. This means brokerage accounts, 401(k), IRA, Roth IRA, and similar vehicles. It does NOT include home equity or car values. Those are real assets, but they can't easily create an income stream for you.
Your Personal Savings Calculator
Plug in your own numbers below to find your spending target and savings rate using this formula.
Savings Rate & Years to $2 Million
The ultimate goal many people aim for is $2 million in invested assets — a number that, at a 4% withdrawal rate, produces $80,000/year in retirement income. How fast you get there comes down almost entirely to your savings rate.
The chart makes it brutally clear: the difference between a 20% and 40% savings rate isn't incremental — it's the difference between retiring in your mid-40s versus your mid-50s. That's a decade of your life.
| Savings Rate | Annual Savings | Annual Spending | Years to $2M | Assessment |
|---|---|---|---|---|
| 10% | $20,000 | $140,000 | ~30 years | Traditional retirement timeline |
| 20% | $40,000 | $120,000 | ~20 years | Healthy — still a long road |
| 30% | $60,000 | $100,000 | ~16 years | Great — meaningful acceleration |
| 38% | $76,000 | $84,000 | ~14 years | Formula result — fast lane |
| 50% | $100,000 | $60,000 | ~11 years | Aggressive — sacrifices today |
Notice that jumping from 10% to 20% cuts 10 years off your timeline. But jumping from 30% to 50% only saves about 5 more years — while cutting your lifestyle spending in half. This is why extreme frugality often isn't worth it. The sweet spot for most people who want early retirement is somewhere between 25% and 40%.
"If instead you spend $120,000 and save $40,000 — a 20% savings rate — it takes just under 20 years to reach $2 million. That's still healthy. But a 38% savings rate gets you there in 14 years. That's six years of your life back. What would you do with six extra years of freedom?"
The Numbers Game, Plain and Simple
The path to financial independence is just math: what you earn, what you spend, and the difference you invest. There's no secret. There's no shortcut. The most important single variable is your savings rate as a percentage of gross income.
Most people who want to retire early should aim for at least 20%, but ideally 30% to 40% to get there meaningfully faster. Of course, the earlier you start investing, the easier it becomes — that's the power of compound interest working in your favor over a longer timeline.
Balance: Don't Sacrifice Everything Today
Here's the nuance that the spreadsheet crowd often misses: after working with many early retirees, I can tell you that deferring enjoyment of life entirely just isn't worth it. People who sacrifice every vacation, every dinner out, every small pleasure — and then finally "retire" at 40 — often find themselves with a broken relationship with money, rusty social skills, and no idea how to actually enjoy the freedom they worked so hard to buy.
The formula above is designed to prevent this. When you anchor your spending to your assets and income, not just arbitrary frugality rules, you get a spending target that grows with your success. As your investments grow, your spending target naturally rises too. You're rewarded for progress — not just punished for spending.
Start with the formula. Know your number. Hit a savings rate between 25–40% if you can. Invest the difference consistently in low-cost index funds. And live your life — just within the boundaries your assets and income actually support. That's not deprivation. That's freedom, built deliberately.
Practical Steps to Get Your Savings Rate Up
1. Know your actual numbers. Most people have no idea what their real savings rate is. Run the calculator above. The answer might surprise you — in either direction.
2. Automate savings before you spend. Move savings to a retirement or brokerage account the day your paycheck hits. Pay yourself first. What doesn't hit your checking account doesn't get spent.
3. Max your 401(k) match first. If your employer matches contributions, that's an automatic 50–100% return on that money before a single day of growth. There is no better investment you can make.
4. Reassess when income rises. When you get a raise, resist the temptation to let spending rise proportionally. Run the formula again. A raise is an opportunity to accelerate — not just upgrade your lifestyle.
5. Track your invested assets quarterly. Watching this number grow is genuinely motivating. It's also how you know whether your spending target should adjust upward over time.