Think As Inc

YOUR MAGIC NUMBER

September 4, 2009 on 2:20 am | In life coaching | No Comments

How much money would you need to be financially free?  A simple rule of thumb is that you can withdraw 4% each year out of your portfolio without running out of money.  Therefore, find out how much you spend each year and multiply by 25.  If you spend $60,000 each year (or $5,000 per month), then you need $1.5 MM to be financially free (because 25 x $60,000 is $1.5 MM, and 4% of $1.5 MM is $60,000).  In this example, $1.5 MM is your magic number.

Knowing your magic number is important to career and life planning because it gives you a quantifiable perspective.  If you have a low paying profession with low salary growth but have a high magic number, then you need additional money coming in or a drop in what you spend.  Either way, knowing your magic number forces you to make conscious choices.  Do you still love that job, now that you know it is incompatible with your financial priorities?  How can you keep that job and reach your financial goals another way (e.g., by saving more or spending less)?  Is the type of job you have always low-paying, or are you not where you should be in your career right now?

Your magic number may change over time.  You may find that your expenses go up (e.g., when you have kids) or go down (e.g., when you pay off your house).  You may find that your lifestyle tastes change and you require more money (e.g., you discover a love for travel) or less (e.g., you simplify your life).  There is no right or wrong magic number.  It is a subjective goal, but it helps put your choices in an objective context.

Your magic number is a starting point to measure where you are and where you want to be.  Use your magic number to question your career path, your financial habits, your lifestyle, and your future goals.  There is nothing magic about the number itself, but if it prompts you to take an inventory of your current life prospects, then there may be something magical in the result.