### The Elusive Number

## The Elusive Number

###### Photo credit: **THEfunkyman**

*Mark illustrates, in a practical way, the dilemma faced when considering one’s future from the perspective a young, single person who only needs a bag, a small stipend and some travel vouchers to be truly happy v. the family guy who needs the Gucci luggage and all the trimmings … well, not quite, but you get my point* …

When we were first asked to calculate the number, I did use the spreadsheet provided here. I did plugged in some formulas to account for inflation for both income and expenses. There are a few major purchases like a home, vacation home and transportation (car only). I was happy with the number since the total matches my original number in the initial application but it was for a slightly different time frame; 7 years vs 10 years.

However, as we did more exercises like coming up with a Lee’s List and refining the spreadsheet, the number did change. For example, in my previous spreadsheet, I did not factor in life events – for example, being married and having kids. I did account for the increase in life expenses but I’ve failed to accommodate new travel expenses. The travel cost ballooned quite a bit after considering additional seats to fill in and the need for larger an better accommodations. Hostels will not work for family, for sure. The original spreadsheet did not account for some of the items in the Lee’s List that we have been working on. I need to add seed money for an Education Foundation as described here.

I did use the Rule of 40 rather than the Rule of 20 for some reason. I think there is some fear of falling short but we will examine both scenarios. The huge buffer might be able to accommodate the additional travel needs, and Lee’s List items when using Rule of 20.

I did calculate numbers for 10 years and 20 years out but I settled for 10 years to be more aggressive. If I didn’t meet my number , I can have another 10 years to do so. Here are the major items in the spreadsheet:

*1) Houses*

Primary residence: $400,000 (in 5 years)

Vacation Home: $350,000 (in 10 years)

*2) Cars*

Used car #1: $30,000 (in 5 years)

Used car #2: $45,000 (in 10 years)

*3) Travel*

There are some elaborate calculations on the spreadsheet. It covers one destination in Asia, one other international destination and some domestic travel. I used the number for the future scenario of being married with 2 kids. The number in 10 years will be about $31,000

*4) Living Expenses*

The living expenses for the projected scenario of being married with 2 kids in 10 years is around $123,500. This is based on an inflation adjusted rate of 4%. We might be facing higher inflation rates but I hope the number calculated using the Rule of 40 can catch cover this scenario.

*5) Items on Lee’s List*

Education foundation: $500,000

Items in 1, 2 and 5 are one time cost items so we are not using the Rule of 20 (or 40) on these items. The total for one time cost items is $1,325,000.

For Travel and Living expenses, we have a total of $154,500. Using the Rule of 20, we will need $3,090,000.

The final number using the Rule of 20 will be $1,325,000 + $3,090,000 = $4,415,000 and if we round it up, it will be the same as my previous numbers at $5,000,000.

If I’m using the Rule of 40 instead like I did the previous calculation, it will be $1,325,000 + $6,180,000 = $7,505,000. So what will the Rule of 40 gives us over Rule of 20 besides having a higher number?

@ Mark – Did you allow for Income Tax? If not, you can divide all of your recurring expenses by .65 (same as assuming that they come AFTER a 35% tax) THEN multiply by 20.

If you want to allow for tax (on the investments that you need to sell in order to free up the cash) for your Major Purchases / One-Off Expenses, you should allow for a Capital Gains tax (currently 15%, but who knows what it will be in 10 years?) by dividing these one-off’s by .85.