This is the first article in a series on money I’m writing. The reason for this article being first is because answering the question ‘how much is enough’ is the one thing you can do that will make the biggest difference to your enjoyment of your life’s journey.
Do you know how much money you need to never have to work another day in your life? Whether you love your work (like I do) or you don’t, knowing this changes everything.
Of course, nobody knows exactly what the future holds, but knowing how much money you actually need gives your life direction and makes it easier to navigate. There isn’t much about the future which is in your control, but deciding how much is enough absolutely is.
One of the best kept secrets in personal finance is that knowing this number—how much is enough—will make your whole life more enjoyable. It sounds ridiculous, but this has been my experience. When you understand how the simple maths works, you will feel in a lot less of a hurry to rush towards the finish line. Instead, you can just relax into the journey, knowing the direction you’re headed towards. At school, I was lousy at maths and I still am. My school-age self would not believe I am saying this, but I’ve finally found a real world application for maths.
Let’s dive in!
How to work out ‘how much is enough’
This is how my partner and I worked out ‘how much is enough’.
- Create a vision for your life in the future — We each created a vision board for ourselves in Canva and then talked about them. From here, we came up with our combined vision. We got really specific and wrote this down in 5-10 bullet points. The more specific you get here, the crazier this vision should seem to others. Some of our bullet points included:
✈️ Live 9 months of the year in NZ and the other 3 with our family in Australia and Vietnam
💸 Financially independent—working for money is optional
🏠 Can buy a house outright, in cash, if we want to
🍽️ Eat out twice a week
Here’s a great way to structure your vision board so you don’t miss anything:
- Work out your current expenses — Our last 3 months’ expenses:
📆 February: $2096
📆 March: $1978
📆 April: $1686
Taking the total from these three months and multiplying by four, you can estimate we currently spend around $23,000 this year.
- Estimate your future annual expenses — A number my partner and I would be happy to live off in the future would be $40,000 per year. For simplicity, we haven’t factored in inflation, since there are also likely to be variables that work in our favour too (like a payrise, or a lucky break or an inheritance). We’re not relying on any of those lucky breaks happening, but it’s statistically likely at least one of those things will happen over the next 50 years.
- Apply the 4% rule — Applying the 4% rule to our future annual expenses: $40,000 x 25 = $1,000,000
This means that when we have $1,000,000 invested in assets (for us, it’s low-cost Vanguard index funds), we could withdraw $40,000 per year and stop working with close to 100% certainty that we would never run out of money. This is our answer to the question “How much is enough”.
- Use a compound interest calculator to project when you will have ‘enough’ — Entering our numbers into the compound interest calculator, with a conservative 6% interest rate, projections suggest we’ll get to $1 million by the age of 45. We’ll see!
The surprising thing about deciding how much is enough
A surprising side effect of going through this process and understanding how the maths works is I feel in a lot less of a hurry to rush towards the finish line.
‘Enough’ doesn’t have to be some crazy unattainable number. In fact, you may need less than you think.
When creating a vision for your ideal life in the future, it might be tempting to seek inspiration by looking at the things you don’t currently have. The good news is that there is actually a lot of research to support the idea that the things that make life worth living aren’t things you need much money for.
Here are some great resources I’ve come across in my own research which—by learning from others’ experiences—might help you determine how much really is enough:
Thanks to Laura Cheftel, Christine Chow, Cynthia Gao, Clarissa Hirst, Rakhesh Martyn, Sierra Truong, Cathy Zeng and Emily Zhu for reading drafts of this.
Also to Dave Cameron, Claire Twyman, Adam Walmsley and Pippa McCormack Wolf for reading a very early draft of this.
Disclaimer: Like your all-knowing uncle telling you the latest stock tip, this should not be considered financial advice.