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If Joe has monthly expenses of $600 rent, $100 insurance, $300 food and entertainment,...

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user6760353 | Student, Undergraduate | eNoter

Posted October 12, 2013 at 2:57 PM via web

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If Joe has monthly expenses of $600 rent, $100 insurance, $300 food and entertainment, and $100 miscellaneous repairs, what will his income need to be (per month) in order to be financially independent?

A. $1,500

B. $2,000

C. $1,350

D. $1,100

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted October 12, 2013 at 3:11 PM (Answer #1)

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If these are all of the expenses that Joe incurs in a given month, Joe will need to make $1100 per month to be financially independent.  Of course, if he makes a higher amount, he will still be financially independent.  $1100 per month is the minimum that he will need in order to be independent.  This calculation assumes that all of Joe’s expenses are covered here.  For example, we assume that he does not have to pay taxes in a lump sum at the end of the year.  We also assume that Joe, for whatever reason, does not have to save any money for his retirement.  This is only concerned with the present and with the expenses listed here.

Financial independence can be defined as the state that is achieved when your income is equal to your expenses (or your income is higher than your expenses).  It is most typically used to refer to a state in which you get your income from something other than work.  In order for Joe to be independent, he has to have at least as much income as expenses.  His expenses are $1100 per month and therefore his income must be at least that much.

Please note that Joe would not be very secure if his income were exactly equal to his expenses.  It would mean that he would have nothing to use to pay for unexpected expenses.  He would not have the ability to save money for later purchases.  This would be the bare minimum on which he could live.

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