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Defining how much money is “enough” is one of the most important decisions you can make financially.
In fact, it’s the one decision that dictates virtually all of your other financial decisions.
If you define “enough” as having $10 million in the bank, you’ll have to work much harder and longer than if you define “enough” as having $1 million in the bank.
For example, consider a 21-year-old who wants to accumulate $1 million. By investing $10,000 each year at a 5% annual rate of return, and increasing their investment amount by 3% each year, they could hit $1 million by age 50:
Instead, if they defined $10 million as “enough,” they’d have to keep diligently investing for another 37 years until age 87 to hit that point:
They would have to sacrifice 37 years to grow their net worth from $1 million to $10 million. Granted, they can do a hell of a lot more with $10 million, but they gave up much of their later years to reach that point.
At age 50, they could use part of the $1 million to buy a modest lake house and make memories out on the water with their children and grandchildren.
At age 87, they could buy a much bigger lake house and a much nicer boat, but due to their age they may have to watch the family from the shoreline.
The 50-year-old has more time, but less money. The 87-year-old has less time, but more money. This is the inherent trade-off that exists between time and money. One often has to be exchanged for the other.
That’s the thing about defining enough: you’re not just defining an amount of money you want to accumulate; you’re defining an amount of time you’re willing to spend chasing that number.
And time is the one thing none of us can get back. Once it’s gone, it’s gone.
How to Define “Enough”
At its core, defining enough is about deciding how much money you need to live a good life on your terms. And how you define a “good life” is dependent on what you value.
My friend Luxe from The Luxe Strategist recently wrote that “true values are revealed by how you use two precious resources: your time and money.”
She shares a few examples:
I know people who live in cheap, sketchy neighborhoods so they can travel all the time.
Others who never travel so they can go to Michelin-starred restaurants.
Parents who will spend nothing on things, but won’t blink twice at activities for their kids.
And some who are happy to spend half their paycheck on your rent. They highly value a calm, peaceful home, even it means they have less money leftover to save or spend on other things.
What you value is unique to your own personality and interests.
I don’t care about dining out at expensive restaurants. Chipotle burritos speak to my soul more than a high-end steak.
I don’t care much about clothing. I’m content with wearing shorts and a t-shirt most days.
Luxury cars don’t appeal to me. My Honda Civic gets me from point A to point B reliably, which is all I want in a car.
I have no desire to own a huge house. I prefer my current apartment that’s easy to maintain, easy to clean, and comes with a monthly rent of $888.
I do, however, value traveling. Seeing different parts of the U.S. and different countries around the world brings me a ton of joy. That’s why travel is one area where I give myself permission to splurge.
Deciding what you value is the first step in defining enough. When you aren’t sure what you value, it’s easy to get caught up in mindless spending that other people deem to be normal. It’s also easy to overspend on things you don’t value.
But once you know what you value, you can then begin to put a price tag on that. You can set a financial goalpost to aim for.
How to Reach “Enough”
The Minimalists once wrote:
How much is enough?
Less than enough is depriving.
More than enough is indulging.
Enough is the sweet spot in the middle.
I like this definition of enough. If you aim too low, you deprive yourself. Aim too high and you indulge without getting any added value.
This applies nicely to personal finance.
Even if you don’t value certain things like a big house or a nice car, it’s entirely possible to deprive yourself by spending too little.
As I mentioned earlier, I don’t care about owning a large home. I care more about convenience and location. So, I spend $888 each month on an apartment that meets these needs. It’s possible, though, for me to spend as little as $500 in a much sketchier neighborhood. However, I’d be sacrificing a sense of safety and well-being just to save money. I’d be depriving myself.
Another example: I don’t care about owning a luxury car. That’s why I drive a Honda Civic. I could drive a much cheaper used car if I wanted to, though. However, I’d be sacrificing reliability and time (for maintenance and repairs) just to save money. Again, I’d be depriving myself.
So, even after I identify the things I don’t value, there’s still a certain amount of money I have to pay for those things to carry out my daily life. This means I want to keep those expenses low, but not too low to the point that I’m depriving myself.
On a monthly basis, the amount I spend to live in a place I enjoy, drive a reliable car, eat the food I enjoy, travel modestly, and do all of the other things I like is about $2,000.
So, “enough” for me is $2,000 per month. Or $24,000 per year.
This means that if I can earn $2,000 each month in an enjoyable way, then I’m essentially living the dream.
There are a few different ways to earn this much each month through a combination of passive and active income.
The 4% Rule
One way to bring in $2,00 each month is to follow the 4% Rule, which states that once you build up a portfolio of 25 times your annual expenses, you can withdraw 4% of the portfolio each year to pay for your annual expenses.
The benefit of this approach is that it provides a completely passive income stream to cover your spending. The downside is that it can take several years and even decades to build up a portfolio this large.
With yearly expenses of $24,000, I would need a portfolio worth $24,000*25 = $600,000.
I currently have about $140k sitting in various financial accounts. With a day job as a data scientist, I was able to save and invest around $40k each year. Assuming a 5% annual rate of return, The Savings Goal Calculator tells me that I would have to save and invest for another 8.2 years to build up a portfolio of $600,000:
This number was a bit too high for me, so I ended up choosing an alternative way to cover my $24,000 in annual expenses: through actively earning income doing something I enjoy.
The Active/Passive Blended Approach
The normal way to cover $2,000 in monthly spending would be to just earn $2,000 working at a job. As a data scientist, I was able to do this. I earned nearly $5,000 each month after taxes, which was more than enough to cover my monthly expenses. Unfortunately, I couldn’t stand working at a day job.
That’s why I quit to pursue income streams that I actually enjoyed. Namely, building income-earning websites.
Instead of building up a massive portfolio to cover all of my expenses, I’ve decided to earn income through a combination of passive income (dividends and interest from investments) and active income (building websites).
The benefit of this approach is that I can start covering my monthly expenses through doing work I find enjoyable now, rather than sticking it out at a day job I couldn’t stand just to build up a huge portfolio.
Going Beyond “Enough”
No matter how much you define to be “enough” money to spend each year to live a good life that aligns with your values, it helps to actually earn more than just that amount each month.
For example, I define “enough” to be $2,000 per month. I could earn just $2,000 each month indefinitely and cover my expenses, but since there is no gap between my income and expenses I would likely feel anxious about my income streams each month.
Instead, if I can consistently earn $3,000 or more each month and keep my spending at $2,000, suddenly I have a nice gap between my income and spending so that I don’t feel as nervous or anxious about my ability to cover my expenses.
My financial goal in the short to medium-term is not to earn just $2,000 per month, but rather to increase this number to $3,000, then $4,000, and beyond. This way, I know that I always have more than enough.
Here’s a quick recap of the big ideas in this post:
1. It’s important to realize that when you define enough, you’re not just defining an amount of money you want to accumulate; you’re defining an amount of time you’re willing to spend chasing that number.
2. Inherently, the more money you need to accumulate, the more time you need to sacrifice accumulating it. This is the natural trade-off that exists between time and money.
3. The way to define enough is to identify your values. Once you know what you value, you can then begin to put a price tag on how much a good life actually costs.
4. Once you know the price of a good life, the next step is to determine how you’ll pay for that life in an enjoyable way. The 4% Rule and the Active/Passive Income Blended Approach offer two ways to do so.
5. If you only earn just “enough” to cover your monthly expenses, you’ll likely be anxious and nervous each month financially. Aim to earn more than just enough so that you can have financial peace of mind.
My favorite free financial tool I’ve been using since 2015 to manage my net worth is Personal Capital. Each month I use their free Investment Checkup tool and Retirement Planner to track my investments and ensure that I’m on the fast track to financial freedom.
My favorite place to find new personal finance articles to read is Collecting Wisdom, a site I created that collects the best personal finance articles floating around the web on a daily basis.
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