Your finances will have a big impact on the quality of your life. The average American will spend most of his life working. Most people don't really enjoy their jobs though. I've always thought that to increase your quality of life, you want to cut out as much frustration and consternation from your life.
With this thought, I came to the conclusion that you want to try to keep the amount of work you do in your life to the bare minimum. At least, work that you hate doing.
The obvious issue is that most people need to work to make money and survive. So, how much does a man have to work in his life?
It depends. Probably a better question to ask is how much money you are going to need?
How much money will you need for the rest of your life?
Most people would brush off the question because they would claim that
"No one can predict the future"
"Only God knows"
"Life is full of uncertainty"
Yes, it is next to impossible to predict the exact dollar amount you will need until you die. However, since personal finance has such an impact on a man's life, it seems insane to not even try to figure out the answer.
While we cannot get a fully accurate number, we can make estimates and get some sort of idea of how much money we will need to accumulate and how much we will have to work in our lifetimes.
This is a process that is ongoing. You have to keep doing it. When you are young, it is difficult to get a good estimate of how much money you need because you have so much life to live. It is like hitting a target from 1000 yards away. However, as you get older, you have less life to live and that target gets closer and closer.
The first thing you want to do is estimate your lifespan. Men here in America live an average of 79 years. If you believe yourself to be in better or worse health than the average American, adjust the average. If you take good care of yourself, it is reasonable to make it to 85 or 90 years old.
When you have your estimated life span, go ahead and subtract your current age. If you estimate to live to age 85 and are currently 30, you have an estimated 55 years left to live.
The second thing you want to do is estimate how much money you spend (or need to spend) within a year. This figure may be difficult to come by depending on how much effort you want to put into it but I'll go into that next time. For this example, lets use $15,000 as an estimate.
At this point, multiply the estimated needed money per year by how many years you have left to live.
In this example $15,000 * 55 = $825,000.
This is how much money Bill is going to need for the rest of his life. But this doesn't account for how much money Bill has right now. For this example, lets say Bill has $25,000 and no debt.
Subtract $25,000 from the $825,000 and Bill needs another $800,000 to retire today at the age of 30.
This really is the basic of basic of personal financial planning.
1. Estimate your life span and figure out how many years you have left to live.
2. Estimate how much money you will need per year.
3. Multiply the two figures to find an amount.
4. Subtract from the total how much money you actually have.
Doing this planning gets you some sort of idea of how much money you need. This number may vary greatly in the long run for several factors.
1. You may live longer or shorter than you expect
2. You will face life changing events that will change how much money you need per year
3. You may face some sort of catastrophe that makes financial planning for you useless
4. Our country/currency/economic environment falls to pieces
The list can just go on from here.
At the age of 30, it is like trying to hit a target that is way far away. But it is important to always be aiming at and trying to hit that target.
The estimates can be as complex as you want them to be as well. You can adjust the calculation to factor in things like inflation, acquisition of real property, family members etc.
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