Designing the Life First, Then the Numbers

Most financial plans start with this year's income and ask what is left over. That approach rarely produces the life a person actually wants, because it never asks what that life is. This chapter works in the other direction: describe the life in specifics, price it honestly, measure the gap between that price and your current path, and then choose which levers to pull. It answers how much a particular way of living costs, and what it would take to get there.

Describe the life in specifics

A vague goal such as "travel more" or "work less" cannot be priced, and what cannot be priced cannot be planned. The first step is to write down what an ordinary year of the life you want would look like, in enough detail that someone else could estimate it.

Useful questions:

• Where do you live, and in what kind of home? Housing is the largest cost for most households, so this answer moves the total more than any other.
• How do you spend a normal weekday? Full-time work, part-time work, work you choose, caring for family, or none of these.
• What happens once a year? Trips, courses, events, gifts, time off.
• Who is included? A partner, children, parents you may support.
• What are the one-off goals? A sabbatical, a business, a home, a career change, a large gift.

Split the answers into two lists, because they are paid for in different ways. Ongoing lifestyle costs recur every year for as long as you live that way. One-off goals happen once, or a few times, and can be saved for over a fixed period.

Price it honestly

Now put a cost on each item, in today's money. Research rather than guess: look up actual rents in the area you want, real fares, course fees, the price of the equipment a hobby needs. People routinely underestimate dreams, especially their running costs. A second home needs insurance, tax and maintenance; a business needs licenses, insurance and a period with little income; a move abroad needs health cover and travel home.

Three habits keep the estimate honest:

1. Count the ongoing costs of one-off purchases. The price of a thing is rarely the full cost of owning it. The true cost of a car calculator shows how large the gap can be for a vehicle.
2. Add a buffer of 10% to 20% for what you have not thought of.
3. Keep everything in today's dollars. The engines in this book adjust for inflation by using a return after inflation, so a target in today's dollars stays meaningful.

The household spending by income benchmark is a useful sense check: if your ideal year costs less than households at your income usually spend on housing and food alone, something is probably missing.

Turn the lifestyle into a target

An ongoing lifestyle is supported either by work or by a portfolio. If the goal is to be free to work less or not at all, the price of the lifestyle can be turned into the portfolio it needs. A common rule of thumb divides yearly spending by a withdrawal rate, so at 4% the target is 25 times spending. The Retirement shelf of the Library explains where the rule comes from and what it leaves out.

The examples below use the engine behind the FIRE calculator: a household with $80,000 invested, saving $2,000 a month, earning 7% a year before 3% inflation.

The full vision, at $72,000 a year, needs about $1,800,000 and, at the current saving rate, takes about 32.3 years. Pricing it carefully often reveals one expensive element that is not central to the dream; housing is a common one. Keeping everything else and choosing a cheaper home, so the life costs $60,000, lowers the target to $1,500,000 and the wait to about 28.9 years.

That is the real use of the exercise: it shows which parts of the dream are expensive, and lets you decide which ones are worth their price. Many people find the expensive part is not the part they care about most.

Pay for one-off goals on purpose

One-off goals work best with their own savings pot, a sinking fund, filled by a fixed monthly transfer over a set number of years. The alternative, borrowing once the moment arrives, costs interest and leaves a payment behind after the experience is over.

Saving $700 a month in a safe account earning about 4.0% builds roughly $26,699 in three years, including $1,499 of interest earned. Borrowing $25,000 at 9.0% instead means paying about $795 a month for three years after the goal, $3,620 of it interest. The monthly amounts are similar; the difference is which side of the goal they fall on, and whether interest is earned or paid.

Close the gap

Compare the target with your current path. The difference is the gap, and there are only four ways to close it. Most plans use more than one.

Earn more. Raises, a job change, or income from a second source. Side income is taxed: self-employment income carries both halves of Social Security and Medicare tax as well as income tax, so the side hustle tax calculator is worth running before counting on it, and the freelance rate calculator helps set a price that covers it. Chapter 4 explains how to keep a raise from disappearing into everyday spending.

Spend less on what is not in the vision. The cuts in chapter 3 matter more here, because every dollar freed now both raises saving and is no longer part of the lifestyle you need to fund later.

Change the price of the dream. Some dreams are cheaper in another place; the geo-arbitrage calculator compares costs between places. Others have a smaller version worth trying first, such as a long trip before a move, or a part-time business before quitting a job.

Change the timeline, or the shape. Many people do not need to stop work entirely to live the life they described. Part-time or chosen work that covers some of the spending lowers the portfolio needed; the Barista FIRE calculator shows how much.