Yes, believe it or not, in order for you and your spouse to see a movie and have a soda every week, it will cost you $18,200.00. Keep reading, and you’ll see how.
How you look at life does not determine whether or not something is wrong or right. Although, when I consider financial matters, since money and math are synonymous with each other, and math doesn’t lie, the application of a “philosophy” to the way you manage your money doesn’t make sense to me. I think that any philosophy that gets creative in the spirit of proving math wrong is a flawed philosophy.
One plus one is two. That’s it. Just two. Math doesn’t lie.
Sometimes I like to look at things on a micro scale in order to grab hold of the big picture. In fact, since I’m surrounded by my world and not outside of it, looking at the big picture sometimes requires an extrapolation of the micro details.
Take the concept of financial security. In line with everything that I have ever thought, but never applied until recently, financial security means you can cover all of your living expenses using the investment income from the money you have saved. Financial security does not mean you make enough money every year, because “enough” is relative to how much you are able to live on. So, enough doesn’t mean anything. It doesn’t mean that you have $100,000 or $200,000 or $1,000,000 in the bank, although that would be helpful, of course.
Financial security means you can successfully live, all expenses paid (remember, expenses being relative) on 8% of your nest egg (thanks Dave Ramsey.) By the way, I dont consider Dave Ramsey to be another one of those financial gurus that has a “philosophy.” I consider him down to earth, mathematically conscious, and full of uncommon sense. Some of you might say, “old school.” As far as I can tell, math hasn’t changed over time even though we try to make it change.
So what does living on 8% of your nest egg mean? It means after you invest your savings in various investment vehicles, predominantly growth stock mutual funds, some of which have a proven long term performance record of around 12% annually, and you adjust for the average 4% annual inflation rate, you end up with somewhere around 8% on the average. This is a long term plan. There is no get rich quick without massive risk.
If you live your financial life applying basic formulas to how you manage money, it doesn’t matter whether you have a million dollars or a thousand dollars. 8% is 8% and if you can live off of 8% then you’re doing what you need to do to be financially secure. Can someone live off of 8% of $1000.00? Not likely. That’s only $80.00/year. So there is a level of realism that you need to incorporate. But who knows, a majority of the world lives on less than a dollar a day.
On a micro scale, if you apply this nest egg rule to your money before you spend it, you can figure out how much you need to put away so you can continue your habits without needing to work. What do you mean? Let’s go uber micro. Let’s say you and your wife enjoyed going to a movie once per week. Your ticket price is $9.50 each, and you both slurp down a large, overpriced concession each time, at a cost of $4.50 each. Your total cost to see that movie is $28.00, plus the ignored costs of time and gas to get to the movie.
So now you can ask yourself, “eight percent of what equals $28.00?” The answer? $350.00. Eight percent of $350.00 is $28.00. Since you go to the movies once per week, in order to be financially secure in this transaction, in other words, in order to see that movie “free of charge,” as your money works for you, you’d need to have a total of $18,200.00 invested in growth stock mutual funds averaging 12% over time.
It’s interesting to look at what you’re spending, then determine how much you’d need to have to cover that expense without working. We will so often look at how much we have and then wonder what happened to it after it’s gone. Start looking forward with your finances. Considering that you’d need $18,200 in the bank to cover this one single activity may help you make some changes in how you spend.