The common question that comes up when people think about retirement is how much money do you need to retire comfortably? This is sometimes known as the retirement number. It’s a dollar figure that essentially represents financial freedom. It’s important to realize that there isn’t a precise answer to this question because the retirement number is a moving target that changes all the time. However there is a general guideline that many financial experts use. It’s called the rule of 300.
The rule works like this. Imagine how much your average monthly expenses would cost if you retired. Then multiply that number by 300. The answer represents how big your retirement nest egg should be before you retire. This idea works because it’s the inverse of the 4% rule. Retirement Number = Monthly Expense x 300
Yay! Now you know how to calculate your retirement number. But it’s important to realize this number only points you in the general direction of your investment target. It may be even way off from how much you actually need to quit your job. But at least it gives you a starting point on your journey to retirement.
Why is the Retirement Number important?
By having a rough estimate of your retirement number you can gauge how much longer you still need to save for retirement. There are plenty of retirement calculators on the internet that you can Google. Most of them require you to input some probable assumptions and then they give you a result. But the 3 main factors that determine when you will retire are…
Your current retirement savings.
Your rate of savings per year.
Your expected rate of return on your investments (after inflation.)
I recently saw a list of financial milestones on The Money Pincher. Ideally all 30 in the list should be achieved when one turns 30 years old I still have a few more years to go before turning 30, but I thought it would be interesting to give it a shot anyway The milestones I’ve already hit are written in green.
1. Financially independent of your parents. Moved out at 21.
2. Debt free. Nope, and probably won’t be for awhile lol.
3. Out of overdraft. Never used it before.
4. Established good credit history. Nope, my credit score dropped last year because of excess credit risk.
5. Have $25,000+ saved for retirement. Over $50,000 in my retirement savings plan.
6. Started an investment portfolio. Yarp
7. Established an emergency fund. I don’t have one yet.
8. Properly insured. I don’t have collision insurance for my car.
9. Maximizing employer benefits. We have free coffee at work but I don’t drink it.
10. In the habit of tracking your spending. I try to stick to a budget
11. Done with impulse purchases. I still buy random stuff sometimes.
12. Willing to spend where it counts. Of course, YOLO
13. In the habit of regularly checking your credit report. Once a year.
14. On top or ahead of all your monthly bills. Pay all my bills on time.
15. At least one big splurge you saved up for and paid in full with cash. Every major purchase in the past has been bought with the help of bank credit.
16. An understanding of personal income taxes and how to minimize what you pay. I need to do more research into maximizing tax efficiency.
17. Diligently saving for a big purchase. Don’t want anything at the moment.
18. A clear direction of your career. I enjoy my work and have set professional goals.
19. A profitable side income. I teach art part time.
20. A positive, growing net worth. Not hard to do when the stock market keeps hitting new record highs.
21. A BHAG for your finances. BHAG stands for “Big Hairy Audacious Goal”. Be financially free by 35.
22. An understanding and a plan of how your money will deliver the lifestyle you want. I have confidence in my financial plan.
23. So over measuring your finances against that of your friends. I still do this. It’s hard not to
24. Less consumption-oriented. I like having stuff. My gold coins from the Canadian mint will last forever.
25. A healthy relationship with credit cards. I pay off my credit card balance almost every month.
26. A regular contribution to charity. I need to do this more regularly.
27. If you’re part of a couple, a healthy way of sharing money with your partner. Don’t have a partner yet.
28. A commitment to putting free or cheap before convenient. I try to be frugal whenever I can but I’m not committed to it. I still buy stuff from 7-11 sometimes.
29. Done paying unnecessary fees. I pay $3.95 a month for bank fees because I don’t keep the minimum balance.
30. An understanding and appreciation for the reality that money is only a tool of exchange, and not worth obsessing over. I’m very emotionally attached to my money
Whew, some of these are not easy. Overall I achieved 14 out of 30. Not bad, but it looks like I still have some ways to go. I wonder how many people can score higher than me Other than being a fun quiz, the list is also a practical guideline for a quick personal finance check-up.
———————————————————————— Random Useless Fact: Some animal activists are more violently opposed to fur than leather because it’s easier to harass rich people than motorcycle gangs.
In 2002 I didn’t have any money of my own yet. But today, I have over $750,000 in gross investments. Sometimes I feel like I don’t value money as much as I used to. I guess a lot can change in 12 years.
Do you ever get the feeling that the more you learn about the world around you, the less you realize you actually know about it? Throughout my adolescent years my view on personal finance was restrained to over simplified rules and models, taught by the public education system, which for practical life purposes meant very little Isn’t it interesting that we learn how to dissect frogs and solve polynomial, algebraic, and transcendental functions in highschool, but are never taught how to buy or sell a home, how to use a credit card, or what kind of investments can be placed into a Roth IRA?
Luckily education doesn’t have to just come from schools. Over the past 6 or so years I have exposed myself to regular doses of financial knowledge from newspapers, business shows, and of course, the internet. And now, in my mid twenties, I have a completely different view on finance. I used to think that money was just a medium of exchange that I could earn, spend, and save. While that’s not necessarily wrong, it doesn’t tell the full picture.
So here’s a better explanation of what money TRULY represents to me.
When I look at money today I see POWER. When I look at my net worth I feel POTENTIAL. When I save money I insure my future SECURITY. When I spend money I’m buying INFLUENCE, and I’m buying back my TIME, which is the most precious commodity in the world! When I read about money I gain KNOWLEDGE & UNDERSTANDING about society. When I invest money I facilitate jobs, wealth, hope for others, and create MEANING to this world. When I waste money I squander my LIBERTY and INDEPENDENCE. When I invest money into stocks I’m buying POSSIBILITIES. When I blog about money I share and disseminate CONFIDENCE. And when I eventually reach financial independence I will experience FREEDOM like never before.
Money gives me perspective and context. By associating money with powerful words it’s easy to understand the importance of financial literacy, not just from a materialistic point of view, but also in terms of reconciling our emotional and personal well being with the modern world we all live in. The more we understand how money works the more dominion and authority we’ll have over all the dimensions of our lives. By controlling our money we control our fates!
Will it take a lot of work to reach financial enlightenment? Maybe. But will it be worth it? Definitely!
Knowledge is power, but just knowing alone cannot lead us to victory. We must also take action if we are to succeed I’ve presented dozens of financial strategies here over the years, such as my investment last week in Dollarama. Many readers have told me they appreciate all the tips I share. But one thing that I can never give to my readers is the confidence to take that knowledge, and turn it into something real for themselves.
This is because the only person who can give you confidence is yourself This is why financial literacy is so important for every individual. It gives you the confidence you need to make wise judgements and take control of your finances.
If someone proved to me that they have consistently made huge profits from trading copper futures, will I jump in head first? Probably not. That’s because I haven’t done enough research on the futures market yet to build up the confidence I need to decide whether or not that’s a good idea for me.
Some people think a raise in income should automatically equal a raise in their spending. But if our spending always follows our earnings then we would have to change our lifestyle habits every time we change jobs or get salary adjustments. Does this mean Elon Musk, CEO of Tesla Motors, who made $78 million last year should only drink water from Acqua di Cristallo? It’s the world’s most expensive bottled water. Each 750 ml bottle sells for $60,000. Jumpin’ jelly beans After all, Elon has to find ways to spend his money in order to match his income right?
Thinking about income and expenses on a year by year basis leads to myopia and it’s how many people get stuck living paycheque to paycheque They fail to see the longer term picture because they can’t escape their short term cycle of income fueled spending. What they should try to focus on instead is goal oriented spending