Have you ever wondered how much money you’d need to live a life where you’re financially comfortable, pursuing your dreams, and free from tiresome jobs? That magic number is your “set for life” number. Here’s how you can calculate it step by step:
Define Your Financial Goals
Imagine taking a sneak peek into your future. What do you see? Maybe you’re sipping coffee on a beach, exploring foreign lands, running your shop, or simply enjoying a cozy home with your loved ones. These dreams aren’t just wishes but your financial goals – the stars you’re reaching for.
Example: Imagine you dream of opening a charming bookstore. You want to travel twice a year and have a comfortable home. These dreams shape your financial goals.
Setting financial goals is like setting a GPS destination for your life’s journey. It helps you know where you’re going and how much fuel (money) you need to get there. Whether it’s a world tour or a peaceful retirement, your goals give purpose to your money choices.
Calculate Your Expenses
Start by taking a closer look at your current spending habits. Create a detailed budget that covers everything from basic necessities like housing, utilities, and groceries to discretionary spending like entertainment and dining out.
Example: If your monthly budget adds up to $4,000, your yearly expenses would be around $48,000.
Account for Inflation
Keep in mind that over time, the cost of living tends to rise due to inflation. When projecting your “set for life” number, factor in the potential increase in expenses to ensure that your funds can maintain their purchasing power.
Example: If the inflation rate is estimated at 3% per year, after 20 years, $100,000 today could be equivalent to $180,000.
Consider Your Desired Lifestyle
Your lifestyle preferences have a significant impact on your financial needs. Consider whether you’re content with a modest lifestyle or if you’re aiming for a more lavish one. Factor in expenses related to hobbies, travel, leisure activities, and other lifestyle choices that align with your goals.
Example: If you’re passionate about travel and plan to visit different countries every year, you’ll need to allocate funds for those adventures.
Factor in One-Time Expenses
Life often presents significant one-time expenses such as buying a house, financing education, or unexpected medical emergencies. Make sure to include these in your calculations to ensure your financial security.
Example: If you plan to buy a house for $300,000, you’ll need to save that amount on top of your regular expenses.
Calculate Retirement Costs
If retiring comfortably is part of your plan, estimate your retirement expenses. Consider factors such as healthcare, travel, hobbies, and other interests that you intend to pursue during retirement.
Example: If you estimate that your retirement expenses would be $50,000 per year, that’s $4,167 per month.
Include an Emergency Fund
Unexpected situations like medical emergencies or sudden job loss can arise. It’s crucial to have a financial safety net. Aim to save an emergency fund covering 3 to 6 months’ worth of expenses.
Example: If your monthly expenses are $2,500, your emergency fund might range from $7,500 to $15,000.
Factor in Investment Returns
Investments have the potential to grow over time. Consider the expected returns on your investments when calculating your “set for life” number.
Example: If you invest $100,000 with an average annual return of 6%, it could grow to about $320,000 after 30 years.
Consult with Financial Advisors (Note: This step may not be necessary for someone who already understands their financial situation.)
Financial advisors are like experienced guides who can help you smartly navigate the world of money. They’re especially useful if you’re unsure where to start or want an expert’s opinion.
When This Step Might Be Useful:
- When Things Feel Complicated: If finances are confusing or overwhelming, a financial advisor can break things down for you.
- When You Want Professional Insights: Advisors look at your unique situation and give advice that fits you best. It’s like getting a tailor-made financial plan.
- When You’re Unsure About Investments: If you’re unsure where to put your money to make it grow, an advisor can suggest options based on your goals and risk comfort.
When This Step Might Not Be Necessary:
- When You’re Comfortable: If you already feel confident about your finances and have a clear plan, you might not need an advisor.
- When You Enjoy Managing Your Money: Some people enjoy learning and managing their finances independently. If that’s you, great job!
- When You’re Clear on Goals: If you’ve got a solid grip on what you want financially and how to get there, you’re in a good spot.
Remember, the goal is to make the best choices for your financial future. Whether you decide to consult a financial advisor or not, the important thing is that you’re taking steps toward understanding and improving your financial wellness.
Regularly Review and Adjust
Life is full of changes, and your financial plan should adapt accordingly. Review your plan annually or when significant life events occur. This ensures you stay on track toward reaching your “set for life” number.
Example: If you get a new job with a higher salary, you might be able to increase your savings and achieve your goal sooner.
Factor in Personal Happiness
While financial security is essential, remember that happiness comes from more than just money. Consider how experiences, relationships, and well-being contribute to your overall quality of life.
Example: Spending quality time with family and friends might bring more joy than buying expensive material possessions.
Calculate Your “set for life” Number
After considering all these factors, use online financial calculators or consult a financial advisor to arrive at your “set for life” number. This number represents the amount you need to achieve your desired level of financial security.
Here is a brief way to calculate your set-for-life number from Vivian Tu：
Step 1: Dream Your Perfect Year
Close your eyes and imagine an entire year of your dream life. Think about all the things you’d love to do, the adventures you’d embark on, and the comfort you’d enjoy.
Example: You might picture yourself traveling to exotic places, dining at your favorite restaurants, and having the freedom to explore new hobbies.
Step 2: Divide by 0.04
Let’s do some math, but don’t worry, it’s easy! Take the total cost of your perfect year and divide it by 0.04. Why 0.04? That’s because it represents the interest your investments could earn, like a little bonus for your money working hard.
Example: If your dream year costs $100,000, divide it by 0.04. So, $100,000 ÷ 0.04 equals $2.5 million.
And there you have it – $2.5 million is your “set for life” number! It’s the amount of money you’d need to have invested so that the interest it earns covers your expenses, letting you enjoy life without a regular job.
This number is like your ticket to financial freedom. It’s your guide to a life where you can do what you love without worrying about money.
Bottom Line
Remember, your “set for life” number is a personalized concept that evolves with your changing goals and circumstances. Regularly review and adjust your plan to ensure you’re on track to achieve your desired financial security and comfortable lifestyle.
