While learning about personal finance theories is a mild hobby of mine, I am particularly interested in learning more given our current time in history. What can I do to set us up to not just weather the downturn, but to thrive?
There is a tool that I have heard from a variety of people & sources* with different modifications that focuses on getting clear on how much you need for a basic lifestyle, and then you look at what you would like and then your big dreams.
It is a planning tool, sorry, I am not going to tell you (at least in this post) how to actually thrive in the downturn. Also, this will involve spreadsheets.
The first step is to get clear on how much you need to bring in per month to meet your basic living expenses. You could choose to look at at this as the bare minimum if you had to cut back (move to live with someone else if an option, eat beans and rice, no eating out, no movies, no…fill in the blank expenses that you have currently). Or you could look at basic but less minimal. Perhaps your current lifestyle, or, if you spend a lot of expendable income regularly, then ratchet down a bit to figure out the basics. Maybe a few meals out a week, and include the gym membership – but not the personal trainer. It will depend on your lifestyle – but choose something that seems basic to you.
To figure it out, list all expenses and categories. You are not looking here on what you spend, but rather what it will cost. Sure, you may want to look at past bills to estimate grocery spending, but again, it’s not what you are spending now but rather what a basic lifestyle will cost.
Okay, got your number?
Then you create a very comfortable lifestyle. What are your dreams that are fairly attainable? Where would you like to increase your spending?
Again, get your monthly total.
Finally, you get clear on your dream life. If suddenly money were no barrier, where would you increase spending? As one guest on Tim Ferriss’ podcast put it, if you had to 10X spending in one area of your life, which area would bring you the most joy?
Then you figure out how much your dream life would actually cost – what you would have to bring in per month to make it happen.
[In Tony Robbins’ book (mentioned and linked below), he uses his version of this exercise to then calculate how much you have to put aside so that you could live each of these lifestyles without actually working (in other words, by estimating growth through investing and living off the income).]
I found that the last step may be the most helpful both because our wildest dreams may not be as far off as they seem if we don’t do the math, and because it forces you to get clear on what areas you would really want to spend more money in.
For example, we live in a smallish house by modern American standards. But upgrading is very low on my list. But if I could 10X my travel budget, oh how excited I get at the places we could go and things we would do!
I also think it is useful to get clear, if you are saving or want to change any part of your lifestyle, on why you are saving and what it could bring you.
And I recognize that right now you may be struggling financially, maybe you are already living the bare necessity life and taking on debt to do it. But no matter where you are, I believe that an honest look is a good first step.
*Those that come to mind immediately include Tony Robbins in Money: Master the Game; Tim Ferriss in 4-Hour Workweek; one of Tim’s podcast guests – it might have been Ramit Sethi but I’m not positive; and my law mentor and owner of New Law Business Model, Alexis Katz.