How much money do you need to live each month? Finding the answer to this question is an essential element of any successful personal finance plan. Unfortunately, the answer isn’t always as easy to answer as we like to think it is. But as we start to organize our finances to set ourselves up for success, there is a process we can take.
Write down what you need to live your lifestyle
Deciding how much money we need to live on starts with a list of all of our current spending. This list is important for two main reasons, the first of which, it helps us determine how much we can invest for our future. The second reason, is that list is an essential component for self-review down the road.
If your current lifestyle demands more expenses than you make in income, this first step has highlighted a serious problem. Overspending will draw down on savings. Unless you are in retirement and planning the final chapters of your life, this overspending could place you in serious financial hardship.
As a general rule, our lifestyles must not cost more than we make in income each month. This means there will be left over resources to allocate to future wealth and plans. How much extra money we have left is up for some debate, but the lowest reasonable number suggested in The Richest Man in Babylon is 10%. Jim Rohn would argue that the number is higher, suggesting 30% of total income be put aside for charity and wealth.
Repeat your lifestyle cost list
Periodically you should compare previous lists to current lists for your lifestyle expenses. This will provide a visual representation to how you have changed and grown over time. These lists are especially important when you experience an increase in income, to ensure that your lifestyle creep doesn’t surpass your income growth.
Our spending habits change over time, so what?
While our spending habits change over time, and as our income grows we become accustomed to a higher standard of living, we need to be conscious of all these elements. This is especially prevalent when looking at how much we save and invest for the future. Often times, when our earnings are lower, we tell ourselves we’ll save more for the future in the future when our income increases. This is especially common among young professionals just getting started in their careers and lives. As our lives and careers progress, we must be intentional about saving enough for future riches. The best way to do this; ensure we aren’t letting our lifestyle creep leave us poor in the future.
What does your lifestyle cost? How much is left over for future riches? Are you living at least below the 90% of income rule? Answering these questions will help you determine if you’re on the right path to financial success.