Writer Tim Urban said that the best thing to write about is what’s been incessantly on your mind.
This has been on my mind:
How much is enough?
Rather than me providing you with something on the premise that I have it figured out (I don’t), let’s do an exercise and think through this together.
A quick summary of the research on money and happiness
To make any rational decision, we first need the facts.
Over the past 10-20 years, I’ve read basically everything I could find on the links between money and happiness. Here’s a quick summary:
- Taking care of your basic needs financially is important (it’s harder to focus on your purpose if you’re worried about your next meal or a large medical bill)
- More money, at some point, has diminishing returns on happiness (some say it’s $75K/year, some say we keep getting happier as we progress from millionaire to deca-millionaire to beyond; yet the returns, as you’d guess, get smaller and smaller)
- Spending money on others and on experiences produces greater gains in happiness than buying stuff
- A lot of the things that make us the happiest cost very little (spending time in nature, spending time with friends and family, exercising, learning something new)
Working backward: What do we want money for?
How do you want to spend your time?
Here’s a quick checklist of common ways almost all of us must spend a portion of our time to live happy, fulfilling lives:
- Build and nurture relationships
- Learn and grow
- Take care of our health
- Pursue hobbies meaningful to us
- Give back to and help others (purpose)
What does your version of that look like for what you consider your best possible life?
Here’s mine:
- Relationships: Spend time with my close family members (dinners, holidays, & vacations). Spend time with my current friends and making new friends
- Learning: Reading good books. Seeing a few people I highly admire speak in public.
- Health: Eating well. Sleeping well. Exercise for cardio and strength. Lots of movement and mobility so I can stay active well into my 80s and 90s.
- Hobbies: Wakesurf. Surf. Spearfish. Ski. Snowboard. Travel.
- Giving back: Share the lessons I’ve learned (usually the hard way) about success, business, and happiness with others through writing, creating videos, and speaking.
How much money do we need?
To back into how much money we need, we’d then need to calculate how much of each activity in our list we’d like to do and how much that would cost.
Just by looking at my list above, I’d estimate all of that would cost less than $100K per year. If I wanted to go really bougie on travel/vacations, then maybe that would double.
We’d also need to factor in the additional cost of our family’s basic needs, such as food, shelter, and medical care. According to the Urban Institute, an American family with children needs around $145K/year to thrive.
This means my ideal life costs about $245K-$345K/year ($20K-$30K/month). (This number is quite interesting because when we’ve asked people interested in starting businesses for their financial goal, the most common answer has always been around $20K/mo. It’s at that level you feel relief from most financial pressure.)
I have fairly expensive tastes. While I have friends who own millions of dollars worth of expensive toys they barely use, I also have friends and family members who are reasonably happy earning less — in some cases, far less — than $245K/year. I’m sure I could figure out how to be happy with a lot less money, but I’m not ready for that yet 🙂
Where does the money you need come from?
A rule of thumb in personal finance is that you can live off 4% of your invested assets. For example, if you have $1 million saved and invested in broadly diversified index funds, you can spend $40K (4%) with little risk of running out of money.
To calculate how much money you need to save based on how much you want to spend, multiply the latter by 25. For example, if you want to spend $100K per year, you need $2.5 million in investments (25X).
Most of us don’t plan on fully retiring anytime soon. We like parts of our work. We’d like to get more rational about how much money we really need so we can focus only on the parts of our work we like (either completely eliminating or hiring away the other parts).
So let’s say you want to comfortably spend $20K/month ($240K/year). If you save and invest $2 million, that reduces the income you need to earn each year by $80K (4%), to $160K/year.
Now, if you can increase income from your business or job to $160K/year, you’re done.
It’s a lot, but not an infinite amount
If you wanted to live only off your investments and earn $20K/month ($240K/year), you’d need $6 million (25X).
Business influencers want you to believe that you should be miserable if you have anything less than $100M. The truth is that $6 million is a lot of money by just about anyone’s standards, especially if we include the entire world.
But it’s not an infinite amount of money. Plus, you don’t have to earn $20K/month. Like many retirees who’ve moved to countries like Costa Rica with lower costs of living, you can live well on far less, such as $5K-$10K/month.
What most people do, I think, is think they must make this massive amount of money, and that large target seems so far off. So they work and work and work without really getting anywhere because, subconsciously, they think they’re really just going to have to work forever and will never get free.
Not true.
Find out what you really want. Calculate how much it will cost. Then use that to back into a realistic target for your wealth and income.
You might find the life you’ve dreamed of is closer than you thought, or you passed up the amount of money you’d need to live that life long ago.
On your side,
Matt
P.S. Quick reminder: As we’re expecting a baby girl soon, this newsletter is now a once-per-week format. Every Tuesday, I’ll share the best strategy or insight I have to help you create a wildly successful, fulfilling business and life.