How a regular 9-to-5 employee earns passive income for financial independence
How to Stress-Test Your FI Number in an Inflationary World
When most people first discover the concept of financial independence (FI), the goal sounds simple:
Find your FI number – that magic figure where your investments can cover your living expenses, and you’re free.
For years, I used to think that once I reached that number, my work would be done. But as time went on, markets changed, inflation crept higher, and I realised something important: your FI number isn’t carved in stone. It needs to be tested, challenged, and adjusted – just like how pilots run through turbulence drills before takeoff.
If you want true peace of mind, not just a spreadsheet projection, you need to stress-test your FI plan.
Why Stress-Testing Matters
When inflation jumps, costs rise quietly in the background – groceries, healthcare, insurance, school fees. Even if you’ve already reached FI, these shifts can slowly eat away at your cushion.
The purpose of stress-testing isn’t to scare yourself. It’s to see how your plan holds up when reality doesn’t go your way.
In the real world, things rarely move in straight lines. Markets crash, inflation spikes, family responsibilities shift. A strong plan is one that keeps you calm – even when numbers on a screen don’t.
1. The Inflation Shock
Let’s start with the most obvious test: inflation.
Imagine your annual spending is $40,000 today. At 2% inflation, in 10 years that’s about $48,800. But at 5% inflation? It balloons to over $65,000. That’s a 60% jump in expenses – without a change in lifestyle.
To test your FI number, simulate a higher inflation rate for the next decade. Ask yourself:
- Can your portfolio income grow at least as fast as inflation?
- Are you investing in businesses with pricing power – the kind that can raise prices without losing customers?
- How exposed are you to fixed-income or stagnant assets?
When inflation accelerates, companies with strong brands, essential products, and consistent dividends often hold up better. That’s why I prefer owning businesses like consumer staples and healthcare – companies people rely on whether the economy is booming or slowing.
If you can still cover your expenses after adjusting for higher inflation, that’s your first green light.
2. The Market Crash Test
Now let’s run a second scenario: what if your portfolio drops 30% right after you hit FI?
This isn’t hypothetical – it happened in 2020. During the COVID-19 crash, my portfolio fell by almost half. On paper, it looked like years of progress disappeared overnight. But I didn’t panic. Instead, I focused on cash flow. Dividends continued arriving every quarter, even if their market prices tumbled.
To stress-test your number, imagine withdrawing from your portfolio during such a downturn. Would you still sleep soundly?
A few questions to consider:
- Do you have at least 6–12 months of expenses in cash or a money market fund?
- Are you relying on selling assets, or on income streams (dividends, rent, royalties)?
- Could you pause withdrawals for a year or two if markets are down?
The goal is not to predict crashes but to ensure you don’t have to sell at the worst possible time. When the tide goes out, you want to be holding businesses that keep paying you to wait.
3. The Health or Family Emergency
Another way to test your plan is to ask: What if life throws a curveball?
A medical emergency, aging parents, or children’s education abroad can easily strain even the best-planned budgets.
Insurance is your financial seatbelt. I always see it as protection for the wealth you’ve built – like patching holes in a sailboat before the storm arrives. Without it, one accident can sink everything you’ve worked for.
Review your coverage periodically. Inflation affects healthcare too. A plan that seemed sufficient five years ago might not be today.
And if your lifestyle involves dependents or ongoing commitments, it helps to keep a “shock absorber fund” – an extra 1–2 years of expenses separate from your regular FI calculation. It may lower your withdrawal rate slightly but greatly increase peace of mind.
4. Currency Risk (Especially for International Investors)
For those of us living in Asia but investing in U.S. markets, there’s another variable: currency movement.
Your portfolio might be in USD, but your daily expenses are in home currency. A sudden drop in your home currency can boost your purchasing power, while a stronger local currency can reduce it.
I monitor this by periodically converting a small portion of dividends into my spending currency. This creates a natural balance. It also keeps me aware of how exchange rate shifts affect my real-world budget.
When stress-testing, try running your numbers with a 10–15% currency swing in both directions. See how it impacts your cash flow. The goal isn’t to hedge perfectly – just to understand the range of outcomes.
5. The Lifestyle Creep Test
Even when inflation is stable, lifestyle inflation can sneak up quietly.
When your investments grow, it’s tempting to upgrade – a bigger home, nicer vacations, more dining out. There’s nothing wrong with enjoying the fruits of your work, but unchecked, lifestyle creep can erode the buffer you’ve built.
To test this, look back at your spending 5 years ago. Has it doubled or tripled? Which parts are intentional upgrades, and which just “happened”?
True financial independence isn’t just about numbers. It’s about maintaining freedom of choice and that requires awareness.
6. Running My Own Stress Test
Here’s how I personally do it. Every year or two, I model a “bad case” scenario for my FI plan:
- Assume 4–5% inflation
- Assume dividends drop by 20% temporarily
- Assume currency weakens by 10%
- Assume I need one unexpected $10,000 family expense
Then I check: can my passive income still cover 80–90% of my needs? If the answer is yes, I know my plan is resilient enough.
I don’t rely on software or fancy spreadsheets – just conservative assumptions and simple math.
Stress-testing gives me confidence not because it predicts the future, but because it proves I can adapt.
Final Thoughts: FI Is About Resilience, Not Perfection
The financial independence journey doesn’t end when you hit your number. It evolves.
Inflation, market cycles, family needs – these are not threats to fear, but realities to prepare for. Stress-testing your plan isn’t about doubting yourself. It’s about building stability under uncertainty.
When you’ve run these tests, something changes inside you. You stop obsessing over daily market moves. You stop worrying about headlines. You simply live your life, knowing your system can handle a few shocks.
In a world where everything seems uncertain, that kind of calm is priceless.
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