How Much Money Do You Really Need?
Originally posted December 29, 2008
As I worked on my Annual Review recently, I finalized a choice I had been pondering for a while. The choice was whether I should continue scrambling to earn a good living as an entrepreneur while writing on the side, or to go “all in” with the project I believed in more – writing full-time. As I thought about it, I realized that while this choice was new to me, it’s fairly typical for anyone who chooses an unconventional career. It’s easy to say you should do what you love, but you have to be able to make some kind of living while doing it. There is no guarantee of success, and many people give up and return to a compromise career.
One of the things that makes the difference between success and failure is basic financial planning.
You may not be able to chart your path to millionaire status right away, but if you can find a way to pay the rent while you’re doing what you love, you’ll be off to a good start. This will free up the pressure to change careers, and may even enable you to leave a job that is unfulfilling.
Three Ways to Plan
There are at least three ways to look at the question, “How Much Money Do You Really Need?” The first is traditional budgeting, or the bottom-up model; the second is capital accumulation; the last is the alternative income plan.
We’ll look at each of these briefly, and if you want to learn more about any one of them, you can find additional resources at the end.
1. Traditional Budgeting
Budgeting itself is fairly simple. Most people can create a budget in less than an hour, using a computer or just a piece of paper. Mint.com, the free software I use to track my finances, has a tool that will help you do this – as does Microsoft Money and Quicken.
If you want to reduce your spending, it’s better to use the bottom-up approach where you base the initial budget on expenses instead of income. This is because we tend to increase our spending as we increase our income. I read in The Atlantic last month that 40% of Americans with incomes of more than $100,000 said they were living “paycheck-to-paycheck.” Naturally, some of us might read that and think, how irresponsible.
But actually, it’s possible to earn $100,000 or any amount of money and struggle more with debt and runaway spending than someone with much less. Whether we make $20,000 or $50,000 or $100,000, we can either find a way to meet our needs at each income level or we can easily lose track of the money.
As I considered the decision to “go pro,” I went through the budgeting process all over again to make sure that a) I would be able to meet our most basic financial needs, and b) I would be able to do at least some of the things we enjoy.
I don’t want to stop traveling the world, and I do want to help Jolie become a professional artist. If we had to give up either of those priorities, then I probably would have found a way to do something different. The major challenge with budgeting is following the budget you’ve set, so it’s important to set a realistic budget based on your own situation and values from the beginning.
2. Capital Accumulation
Since the promises of pensions and social security payments are increasingly unreliable, most traditional retirement planning focuses on the goal of accumulating enough money to live off the interest and dividends. I also focused on this for a few years, and began saving diligently for what I hoped to be financial independence. This was before:
a) I realized I like working and never want to formally “retire”
b) I changed my work to focus more on writing and less on earning money
c) The stock market stopped making free money for all of us and started taking it away
All three of these events led me to reconsider whether I really wanted to spend a number of years with making money as my primary focus. The more I considered it, the more I realized I wanted to spend the most productive years of my life doing things I enjoy.
One of the early ideas for this site that it would track my goal of creating financial independence while I traveled to every country and went to school full-time. Well, plans can change. I’m no longer in school, and I’m no longer on track for financial independence anytime soon. But that’s OK, because what we’re building over here is better than that.
In addition to the reasons listed above, I also realized that it was going to take me a really long time to acquire a large amount of capital. Granted, I was on the right track – most wealth is created by entrepreneurs, not through working for someone else – but as best as I could forecast it, it would probably take me at least 5-7 years and perhaps longer to achieve the wealth I had hoped for. I still have capital accumulation as a long-term goal, but it’s faded into the background as I now use a version of the alternative income plan below.
3. The Alternative Income Plan
The alternative approach focuses on income much more than wealth. Since most of us are not on track to become the next Rockefeller or Kennedy, it can be more realistic (and also more motivating) to focus on creating the income we need for the lifestyle we desire.
After building a budget to cover basic needs and designating funds for charitable giving, I begin looking at specific expenses that are technically optional, but still important to me.
- I want to buy a new Round-the-World ticket, and I’ve set it as a major travel goal for next year. The ticket will reduce my overall flight costs to less than $400 per trip, but the initial investment is about $5,000. Therefore, I have a new project to work on: “Get $5k for the RTW ticket.”
- I really enjoyed our end-of-year vacation a couple of weeks ago, and I definitely want to repeat that at the end of 2009. It will cost approximately $3,000 to do that, so I’ve set that as another mini-project: “Get $3k to fund 2009 vacation.”
This kind of planning always comes back to values – what do you really want? What is most important? I value life experiences more than “stuff,” so after meeting basic needs (including a charity fund), I spend most of my disposable income on world adventures. You may not have the same priorities, but I guarantee it will help to spend some time thinking about how much money you need to do the things you want.
As I finished up the Annual Review, I settled on a personal theme: 2009 is the Year of Convergence. I’m going all-in on what I really want to do, and I’m going to do this full-time next year.
In terms of my finances, the next step is to look at what that means in detail. I’ve created a revised budget, put the financial independence (capital accumulation) plans on hold, and started working on finding a way to pay for the next Round-the-World ticket.
In the upcoming sequel to the World Domination manifesto, I’ll include detailed estimates of how I plan to earn my living through this project. It doesn’t help to be vague, so I’ll be very specific and provide real numbers.
Since many readers here are also working in unconventional careers, I’m curious to know what you think about financial planning during the imploding economy.
What’s missing here that you would like to add?
Image: Austin Kleon