Redefining Your “Rich”: The 5-Step Formula to Calculate How Much Money You Need & Want (free worksheet)

Written by Scott August 13, 2015

“Rich is a state of mind that should be nurtured before the money comes.”

– Lonnie Rush

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Note: This article is a detailed guide on how to calculate how much money you need to do the things you care about, live your legend and be happy. I also created a free spreadsheet template to allow you to put the principles to use immediately. Download your own copy at the bottom of this article. 

Now, let’s talk money.

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Avoiding the Endless Empty Pursuit of More

You’ve probably heard the scene before…

The young intern asks the big time Wall Street CEO,

“So, what’s your number? The amount you’d need to leave it all?”

The CEO gives a short pause, as if to build anticipation, and then responds with a slight smirk,

“More.” 

This is what we want to avoid.

And it begs the question for the rest of us…

How much money do you need to be happy?

How much is enough, for you personally, to do the things you want?

Have you ever taken the time to actually back into that magic number? To sketch it out and get specific?

If you haven’t, then without realizing it, your answer is about the same as that CEO – and just as impossible to achieve.

Today we’re going to change that.

The Surprising $75,000

As it turns out, the magic number may be a lot less than most would think.

In a popular New York Times article Elizabeth Dunn and Michael Norton uncovered some surprising findings showing that, at least in the U.S., additional income above $75,000 doesn’t add much (if anything) to our daily happiness (source data from The Journal of Positive Psychology can be found here). Here’s a direct quote from their article…

“The catch is that additional income doesn’t buy us any additional happiness on a typical day once we reach that comfortable standard. The magic number that defines this “comfortable standard” varies across individuals and countries, but in the United States, it seems to fall somewhere around $75,000.

Using Gallup data collected from almost half a million Americans, researchers at Princeton found that higher household incomes were associated with better moods on a daily basis – but the beneficial effects of money tapered off entirely after the $75,000 mark.”

This number is hard for a lot of people to believe, especially those convinced they need it all (or at least “more”), and that more shillings in the pocket will solve all their problems.

And yes, money is important, especially if you’re down near the poverty level and aren’t able to make ends meet. No question about it. But it doesn’t take long before it stops driving happiness.

Perhaps we shouldn’t be so surprised. When we think back on most things that make us smile – time with people we love, experiences, that first kiss, your daughter being born, growth, progress, achievement, contribution and the pursuit of something meaningful (i.e. doing work you love and living your legend!) – none of those have to cost anything.

But the point isn’t the actual number anyway, as all studies have biases and any number will of course vary depending on all kinds of factors, like where you live, family size, etc.

The real point is that however you splice it, the magic “happiness” number tends to be a lot lower than most people think (or want to admit), and more importantly, much lower than most people are endlessly sacrificing and striving for.

So today we’re going to take a crack at killing the assumptions and defining your number.

Our goal is to replace “more” with something specific. And to hopefully liberate you a bit. Because – contrary to societal insistence – living a good life, pursuing dreams and living your legend doesn’t have to require you to sell your soul to the highest bidder.

Not even close.

Here are the five steps to get there, and below them you’ll find the free downloadable spreadsheet template to go with them.

Time to get clear…

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How Much Is Enough?

The 5-Step Formula for Calculating How Much Money You Actually Need to Do What You Want, Live Your Legend & Be Happy

A few important things to make this useful:

  • First off, a little (hopefully obvious) disclaimer: I’m not a financial planner and this is only meant as a first (but important) step for evaluating one’s finances and what’s required to live your dreams. Everyone’s responses and categories for these will be unique based on personal situation, needs, desires, family make-up, etc., and the amounts will likely change over time. Our main purpose is to create awareness and get a baseline. For simplicity, I’ve also ignored tax implications. 
  • Be detailed, specific and honest. This exercise only works if you complete the steps based on your true current and past financial situation and what you actually care about having and doing in the future. Be brutally honest.
  • First complete these steps on your own. Then do them again with someone close to you, ideally with your significant other, to see how well-aligned your values and vision are. Warning: this can be a delicate dance. 😉
  • Then complete it with a group of close friends/peers who can keep you honest and accountable.
  • Revisit and complete at least every year; ideally every quarter.
  • Download and use the free linked spreadsheet template you’ll find at the end of this article. I created it just for you guys – all I ask in return is that you put it to use!

Step #1: How Much Do You Currently Spend?

The Goal: This first step is awareness. We’ve heard it said plenty – what gets measured, gets managed. In order to make progress we have to know where we stand and where we’ve come from.

The Task: Go through your past year of spending and list how much you spent total in the year and also what the average was per month. Include all cash, credit and accounts – don’t leave anything out.

Suggested Tool: I love using the free service Mint.com. It puts all your accounts, credit cards and spending into one place, categorizes them and allows you to analyze and compare spending, set budgets, see trends, etc. It makes tracking finances (and saving money) easy and actually fun. I try to review this each week during my weekly planning, and at the very least do a full review each month.

Step #2: Calculate Your “Survival” Number

The Goal: Figure out the bare minimum you and your family need to be secure and survive. We’re not talking luxury and fun, we’re talking pure survival here. The amount you’d need in a worst-case scenario to make ends meet.

The Tasks:

  1. Start by going through your list of the past year’s expenses and putting them into one of two categories: Must Have or Nice to Have. The Must Haves are your survival level. Current housing/mortgage, utilities, food, transportation, medical, insurance, etc. would be included here. While basic food and groceries are included, nice dinners out are not.   
  2. List out your monthly Must Haves by category and total for the month. Also be sure to include an emergency cushion to cover random “expected unexpected” things that usually come up, like house/car repairs, traffic tickets, etc. Even if they don’t occur on a set schedule, you know yourself and the types of things that happen. If you get an average of two parking tickets a year, then that’s a real cost to account for.
  3. Also add up your total monthly Nice to Haves. This will help show you the cushion of how much of your spending is above survival, and what could be diverted other places if need be (like funding a passion project, dream, etc.).

Step #3: Calculate Your “Life Is Good” Number

The Goal: Figure out how much you’d need to make each month and year to live happy and content for the rest of your life. The amount that would allow you to live a good life doing the things you want to do, but not crazy outlandish spending. Some nice dinners out, vacations, shopping, small luxuries, charity, maybe better housing and other nice/fun things for you and your family and friends.

Important Tips:

  • Do research and get as specific as possible for each. For example, for house, think of size of house, where you’d want to live, buying or renting and what average costs are in the area. Do the same for the types of vacations you want to take and where you like to eat out, etc.
  • Past spending and Nice to Haves will also be a helpful starter for some of this. You obviously won’t come up with anything exact, but doing a little research and finding some real cost estimates is what makes this exercise so powerful. Take the time to get specific with real data.
  • Remember, often the biggest expenses for launching passion projects and new business pursuits are time, energy and dedication, not huge sums of money. Live Your Legend only cost me $62.90 to start – plus a lot of sweat equity. 🙂
  • Don’t forget to budget for charity. There’s a lot of research showing that doing things for others brings more happiness and satisfaction than doing more and more for yourself.
  • Under-indulgence is also a powerful habit to embrace. Dunn’s article discusses numerous studies proving that consuming less (even if you can afford more) actually makes you appreciate things more and leads to more happiness and satisfaction. Spend less, enjoy more!

The Tasks:

  1. Think through the various spending categories such as housing, dinners out, shopping, car, vacations, entertainment, small luxuries, charity, money for passion projects/hobbies/business ideas and anything else you’re excited about or think you’d like to spend money on in a Life Is Good scenario.
  2. List each category and the monthly or yearly amount you think they will cost (sometimes it’s easier to think of big expenses like vacations as yearly, then divide by 12 for monthly average).
  3. Then add up the total for the year and month.
  4. Add this amount to your Survival number to get the total Life Is Good number.
  5. Be sure you don’t double count things that were already in your Survival number, such as baseline housing, food, etc. – only count the additional spending you’d like to do in a Life Is Good scenario.

Step #4: Calculate Your “Dream” Number

The Goal: Figure out how much you’d need to do pretty much all the things you’ve ever wanted to do. This is not a level you need to be happy, but more of a fun bonus level if things go incredibly well. Have fun with this, but only list the things, dreams and experiences you actually care about. Don’t just throw on “five vacation houses around the world” if that’s not something that actually matters to you.

Important Tips on the Surprising Cost of Dreams:

  • There’s more than one way to experience dreams, and they often don’t have to cost nearly as much as you think. Renting/leasing instead of buying can make a huge difference, especially for luxury items, and avoids the risk of buying something huge that you don’t care about (or brings added complexity, frustration and regret) a few months or years later.
  • Instead of buying a million-dollar vacation house in Europe or Hawaii or wherever, you could probably rent one for a week or two for a few thousand dollars. Same goes for a nice car, plane or yacht, if you really want to get crazy (although, befriending a yacht owner might be a smarter move.) Most of the novelty and fun are in the initial experience of the new “toy” anyway. This practice can save a fortune and allow you to experience a lot more cool stuff.
  • Going on a one-year trip around the world is another good example. Most people think they need to make a fortune and wait for retirement before something like this could be possible, but as it turns out, a year traveling the world can cost less than your day-to-day life at home. As of writing this, we’re seven months into our World Tour, and we’ve spent an average of 14.8% less than our normal life at home compared to last year. And this despite splurging on some very luxurious experiences and doing a lot of things we’d only seen in movies or read about in books. (See our monthly World Tour expense tracking here.)
  • We’ve also used credit card points to book $5,000-$10,000 business class flights all over the world using simple tactics anyone could employ (we haven’t bought a long-haul international flight in over five years). And you could use something like Airbnb to get paid good money while you travel. We’ve done it to pay for nearly a whole month of luxury in Thailand, and a friend of ours made an extra $40,000 in a year doing the same.
  • Consider prioritizing experiences over things. They tend to bring more enjoyment, provide more memories, keep life simple and can cost a lot less.
  • And probably most importantly, don’t forget the incredible and free luxury all of us have just by living in today’s abundant and connected world! Having on-demand access to things like the Internet, hotels and state-of-the-art jets that will fly us anywhere in the world, at nearly a moment’s notice, for incredible prices. You don’t need a billion dollars and a private plane to experience that. You don’t even need a thousand dollars! The fact that commercial flights offer that freedom, for the prices they do, without us having to take on any extra financial risk to experience it, is an unbelievable miracle. Just being born and living in today’s world makes us incredibly rich. Cherish it!
  • Read my article on How to Feel Rich (Even When You Think You’re Poor) for some needed perspective.

The Tasks:

  1. Think through each luxury thing you’d like to do or have and list them out with estimated costs for each. Doing the research to get specific costs for these big items is especially important, as they can be a lot less than you think. Also investigate if there are other creative and less-expensive ways to experience the same dream. If so, use that cost.
  2. For each item ask yourself if you actually care about it, and if so, why? Listing out the why can help you get clear on whether it’s something that should actually be on your list or not, or if it’s just something society and surroundings have convinced you you’re supposed to want. Be liberal about cutting items if you decide they don’t matter.
  3. Add up the total luxury amount for the year and add this to your Life Is Good number to get your total Dream number.
  4. Be sure you don’t double count things that were already in your Life Is Good number, such as vacations, entertainment, etc. – only count the additional spending you’d like to do in a Dream scenario.

Step #5: Define Your Gap

The Goal: Every big change starts with awareness. Now that you know your numbers, we want to figure out the difference between where you are now and where you want to be.

The Task: Write down your current annual income and subtract the total yearly number for each of the scenarios to calculate the surplus or gap between what you’re making now and what you need and want.

Bonus Step: Pay Yourself First & Fund a Dream

The Goal: This exercise wouldn’t be complete without taking some steps to actually get you closer to experiencing a dream, so this is Dream Funding 101! We want to set up a simple system for ensuring you experience one of your Life Is Good or Dream items – likely faster than you planned.

Tip: We do this by putting money away on a consistent basis before we have a chance to spend it. I began doing this year’s ago when we first started talking about doing our yearlong world tour. I opened a new dedicated “World Tour” savings account and set up an auto transfer of a few hundred dollars that happened first thing each month. It adds up fast, and I never missed the money!

The Tasks:

  • Pick one item from your Life Is Good or Dream list that’s most important to you.
  • Then pick a small amount to “pay yourself first” each month before you have a chance to spend it. Ideally set up an auto transfer into a totally different account so there’s no temptation to spend.
  • Optional: divide your monthly savings by the total cost of the experience to see how many months it will take
  • Forget about it, let it add up and get back to pursuing what matters. Then go have a little fun!

What’s Next: Once you’ve completed each step, go back through them with your significant other and/or someone else close to you. Then make a plan to revisit the exercise every few months or year, at the least.

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Remove the Pressure and Give Yourself Permission to Do What Matters

When I first did this exercise, was honest about my answers and did the specific research to understand costs of various things, I was shocked to see where it all ended up – pleasantly surprised, that is.

I had already passed my Life Is Good number. Yet if you’d have asked me before doing the exercise, I would have told you I wasn’t even close!

I realized then I needed a lot less than I thought, and that was incredibly liberating.

That’s the real point here.

If you think you need some ridiculous, undefined and perpetually growing amount of money to do what you want to do and be happy, that thinking can create some very dangerous pressure. Because that pressure can lead you to prioritize the wrong things – to base your life, business and career decisions on what will fetch the highest dollar instead of what’s most interesting, exciting and rewarding.

If you think you need to make enough to buy a small country (or whatever), you may never even attempt to pursue your passions, and actually find and do work you love, assuming your interests could never make you what you “need”. And worst of all, you might be making these decisions without even knowing it.

You’ve failed before you’ve even started.

In order to pursue what matters, we must remove the pressure.

Doing that creates the freedom that makes a lot more possible. And ironically, it’s dedication to what makes us come alive that makes us a lot more likely to hit our Dream number, or blow right through it.

But it all starts with clarity.

“I wish I would have made less money.”

The last time I did this exercise was last December during an annual mastermind retreat I do with some good friends in the mountains near San Francisco.

While we were there, one of the neighbors stopped by to say hello. He’s a friend and mentor about twice our age, who had come from nothing and been incredibly successful in business. He’d made more than $100 million in his career, but you’d never know it by his simple, casual, down-to-earth demeanor.

He was excited to see the above exercise sketched out on the whiteboard, mentioning he wished he’d done something similar when he was our age.

We opened a round of beers and spent the next few hours trading stories and ideas, although most the time was spent listening to him share the kind of war stories you’d usually only read in a book. The good, the bad, the hilarious, the massive wins and multi-million-dollar losses – he covered it all, in what seemed like pure and brutal honesty.

After one of his more vulnerable stories, one of us looked over and asked what all of us were thinking…

“So, do you wish you would have made less money?”

He looked at us for a second, and responded as if he’d thought about it many times before.

“You know what? Yeah, I wish I would have made less.”

He loved his career and was grateful for the incredible success he’d experienced, but also totally transparent about the unexpected problems, expectations and pressures it had brought to him, his life and relationships, and the stress and sacrifice required to get there.

I’d never heard someone talk about money that way, especially who’d come from near poverty and experienced the world from both extremes.

Yet he was so clear about it.

More is not an answer. 

But without specific clarity on what matters, that’s what your answer will always be.

And it’s that endless, empty pursuit that creates the pressure that can ruin our chances of ever doing the things we actually care about. Talk about a total backfire.

If you’re reading this, you probably have it better than you think.

The fact that you’re even able to read this, wherever you are in the world, within seconds of me publishing it, proves we live in an entirely new world of possibility than decades past.

Rich is a state of mind that should be nurtured – before the money comes.

We have so much more than we realize, and need so much less than we think. 

Knowing that is freedom.

Once you know it, life becomes a lot more fun.

And you’ll have a much better shot at doing the things you used to only dream about.

Who knows, you might be a lot closer (and richer) than you think.

There’s only one way to find out!

Here’s to clarity,

–Scott

P.S. Download the Free Spreadsheet Template:

To help make sure you actually go through the process and to make it a lot easier (and more fun) to complete, I’ve created a blank Google spreadsheet template for you to download and use. I’ve added it to the LYL Passionate Work Toolkit, which is available for free to members of our LYL email community. Join us and download yours below!

Click here to download your free How Much Money Do You Need to Live Your Legend spreadsheet template.

Download Your Free Spreadsheet Here

Image Credit: A luxury resort and beach club in Pomorie, Bulgaria that goes for $50/night. We traveled throughout Bulgaria for all of May and spent 41% less that month than we did living our normal lives at home the year before. The good life doesn’t have to cost much. And I’d recommend that beautiful country to anyone. 

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“You are the average of the five people you spend the most time with.” - Jim Rohn