List every item that you will spend money on per year, or month. Some things are monthly expenses like rent or mortgage or food, other things are not every month, like flights, hotels, etc.
You must get an annual cost of living, so determine each item and end up with an annual cost of living as if you are at home.
- Rent
- Food
- Utilities
- Gym membership
Anything you spend money on each and every month.
For travel, flights and hotels, for example for 3 months of travel a year, each month:
- Flights $5,000
- Hotels $10,000
- Car rental $1,000
That makes $48,000 per year in travel-only expenses. Put it in the calculations either in a monthly amount of $4,000 or in the total annual amount.
These are real numbers, do NOT put in things like, maybe I will take a trip that will cost $100,000. That comes later in the exercise, not at this step.
Now that you have your annual expenses, with what reflects how you really think you spend, this must be accurate so, if you can, use your past 3 years’ expenses, and get as accurate as possible a figure of what you have been spending per year.
If you cannot get an accurate history, then you must start today, so you can build your factual evidence of what it costs you to live.
I keep a log of my expenses to the very dollar every month for the past 15 years, so I have a factual number to use to check if I am being reasonable in my projection.
What you want to have is as close to an accurate number of what you really spend per year, assuming you are living in a way you like to live.
That is your first number.
Next, do the same calculation again but this time, make it how you would like to live assuming you did not have to work and set that based on the quality of living, meaning what level of luxury you want. That may increase your travel expenses since you will have more time to travel and it may increase your costs of living for your home for example. But still, NO ‘maybe I will take a trip that will cost $100,000’ type of things.
Be comfortable but realistic. For example, you do not plan on $1,000 per night hotels for 3 months, that is not realistic, because you will not find that for 3 months. Maybe that will be for 3 weeks within 3 months, and the rest of the days at $300 a night hotel, so you can work out the total based on that type of projection. 21 nights X $1,000 + 70 X $300 = $42,000 per year in hotels. You need to work out what is reasonable for you. This is really high end travel, but these numbers are just for example to show you the calculations.
This is your second number. It is the ideal way you want to live for the rest of your life. It is critical that you research the numbers to make them accurate and not imaginary. For example, look at flight costs to take a trip, and check hotels in places you dream of going, or Airbnb costs if you want to stay longer in some places. NO guesswork, because you have to defend your budget to a very critical judge who is going to pick it apart and any flaw of missing evidence will toss your whole plan out of the subconscious mind making it refuse to accept it.
You can add the cost of a new car every 5 years, deducting the trade-in value of the previous car, and put that cost in the projection divided over the number of months that you choose to own a car 36 for 3 years, 60 for 5 years, etc.
Do that for any other big expenses that you would like to include every X number of years.
Next, extrapolate that annual expense to be 7% of that amount, and now you will have the total amount you need to give you the income based on fixed income long-term bonds. 7% is the return on high-quality corporate and Sovereign bonds that you can get today, December 2025. You will need to adjust that percentage return at the time you are doing this exercise as it could be higher or lower.
The calculation, assuming $100,000 total annual costs are: $100,000 / .07 = 1,430,000 (rounded)
Now you know that if you need $100,000 per year to live the life you dream of, that will make you feel free and comfortable for the rest of your life, you need $1,430,000. I have never had a student who was not surprised and relieved to find the real number, they always imagine a much higher number which destroyed their motivation because they thought they would never achieve their goal.
The problem is if you think that you need $50,000,000 because that is a number you pulled out of your imagination, your subconscious will just give up because that is unrealistic for you to achieve, or if you do not have a number, then even more so, your subconscious will just go to sleep and not give you any clarity, and hence, your life will always feel lost and without direction. You took away the guidance system from the pilot of your life. But, if you say $2,000,000, your subconscious says that is reasonable to achieve, and will then give you ideas, motivation, positive energy and increase your awareness and courage to find the ways to make that money.
Reasonable and Feasible. Those are the requirements to make any goal achievable, despite what the false ideas of the LOA law of attraction proponents tell you that you can achieve anything you want just by believing it. They do not tell you that the goal must be feasible and reasonable in order to get the powers of the mind behind it. This one paragraph is telling you why so many people believe in the law of attraction and the false teachers and yet so few ever achieve their goals.
The next number is to double the income and therefore double the total capital amount you need. This is so that you have excess income to cover any unexpected big purchases or expenses that may arise and also to combat inflation by increasing your capital every year which then of course increases your income every year by reinvesting the excess.
The reality is somewhere in between those two numbers as your financial goal.
If you do not have an accurate history of expenses going back several years to base your calculations on, then you will need to start recording that every month, and in that list you will separate the following columns in a spreadsheet:
General living, which includes food, home, etc.
Travel. This is hotels, flights, car rental, etc, but NOT food or things you would pay for if you are at home. This is just the extra costs of travel that you would not have in your general living expenses.
Extra expenses. If you buy a new car once in 5 years, it goes as an expense on the date you pay, but it is a separate column.
Add other columns for anything else you do that is on rare occasions, big charity gifts, medical, etc. This is just to have on the spreadsheet and there will be many months or years that it is empty.
So now you have your total expenses, meaning every dollar that went out, and all the other unusual expenses, and then a column that subtracts all the unusual expenses from the total, so you can see what you would spend in a month if you did not do any ‘out of the ordinary’ living. Now you have an accurate base amount of money to determine your goal of the total capital amount you need.
With this spreadsheet, you can determine what you need as your basic annual income plus you can amortise the extra expenses over the year, to get the actual amount you need as your monthly or annual income total.
You must start this now, and if you can go back through all your bank statements for as long as you can to make up the history for a long enough period of time, then it becomes easier to project the future. Otherwise, it will take you a couple of years of data before you can defend your numbers as being accurate.
If you will only start this accounting from now, then you have to be prepared to adjust the total amount you need after one and two and three years from now when you have accurate factual data. Because if there is no documented history, then it is guesswork.
This all has nothing to do with investments. This is simply to find the number you need to have so that you can relax for the rest of your life without worrying or thinking of working to earn money.
As for where to put your money, to get the 7% or whatever the return is reasonable at the time you have the money to invest, that may change, but base it on something that is secure and fixed for 10, 20 or longer years. This is another topic to discuss that is only relevant at the time, but I invest in high quality corporate and Sovereign bonds with 20 or longer years to maturity with a fixed coupon interest payment for the term of the bond. This way, there is no fluctuation of my income for so long that my mind has achieved total relaxation and peace.
Do all this, then we discuss your results and go to next steps.
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