What would the map of your Money Life-Cycle look like?
Usually, when people draw a map, they start with their current location, and they slowly plan out a journey from here to there. But I recommend a mapping process that goes in reverse.
My philosophy regarding money is to Start At the End, and work backward, planning so that each milestone along the way is covered, while also making sure that your final goal won’t come up short. You don’t want to run out of fuel before the end of the journey!
What does it mean to Start At the End? I begin the mapping process with a retirement calculator, and I modify the assumptions in the calculator to better reflect a risk-averse profile:
- Calculate your retirement savings plan based upon a life span of 100 years
- Plan your retirement savings rate based upon an early retirement age, such as 60, which takes into account a potentially lower Social Security benefit
This will help you know what your monthly savings goal should be, and how your end-of-life experience may be impacted depending on how you adjust this goal, both upward and downward.
Based on this savings goal, you can calculate how much you have left over each month for daily living and your other interim milestones, such as:
- Education
- Weddings
- Travel
- Child-rearing
Calculate a monthly savings allotment for each milestone of which you’re aware, and subtract it out from your leftover take-home pay, as well. This gives you your total for daily living expenses, which is likely smaller than expected after retirement, end-of-life, and other milestones are considered. Living on this smaller amount may be challenging, so numerous strategies may become crucial:
- Practice living on a reduced, fixed income, since this will be more difficult in old age than while you’re younger and can substitute your time and labor for things that you may have to purchase while elderly
- Follow Thomas Stanley’s guideline to keep only 25% of your assets maximum in real estate, with the rest more accessible
- Rent (rather than buy) a home if your monthly housing costs will be lower (considering all home-ownership costs, including principal, interest, taxes, insurance, PMI, maintenance, repairs, extra utilities, extra commuting if farther away from your job, extra furnishings, etc.)
There are also non-monetary steps you can take that may ultimately have a positive effect on your finances:
- Build good physical and mental exercise habits, to ensure that you can stay physically healthy and strong for as long as possible – which can help you save money too
- Solidify your bonds with your family, friends, and community to ensure a solid social safety net beyond what government may provide
You can return to your retirement calculator each year to check your progress, or you can determine a simpler way to gauge your financial status.
One of these is to check your net worth progress is to use Thomas Stanley’s calculation:
Your Age divided by 10, times your Salary
Example: 40 years old divided by 10 = 4, times your $50,000 salary = $200,000 ideal minimum net worth
As the topography of your Money Life changes over the years, and milestones are added or subtracted, your Money Life-Cycle will change also. Keep your tools handy for readjusting your life-cycle map along the way.
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