This year is to be an appreciation of life; a focused pursuit of wisdom; a year of relentlessly chasing boredom.
Mooore! – The battlecry of modern day man. No longer aware of how much he needs, but rather how much he can get. No longer working as the means to an end, but caught in the endless cycle of working-consumption with no end in sight.
What if it didn’t have to be this way? What if we could reverse our outlooks to create a better way of living. I think the answer lies in something extremely mundane: financial planning.
In life we always know exactly how much we earn, yet we rarely know (even vaguely) how much we need. I think this disparity creates a self-limiting belief that restricts our ability to live the life we want.
As part of my distributed retirement I wrapped up 2016 with a three-month retirement in Japan. It was possibly the best thing I have done with my life. Japan has a unique culture, with subtle qualities that are best appreciated over a longer stay. So early this year when I sat down to plan what I wanted 2017 to look like, the first thing that came to mind was more travel. There is a global awareness that you gain when travelling that puts your life back into context. I wanted more of this.
“How much can I travel this year?” was where this exploration started. The logical progression from this was, “How much money do I need to travel?” Which in turn got me thinking about life more broadly, “How much money do I actually need to live?”
I realised I couldn’t answer this question. I could instantly tell you how much money I make each year, but I didn’t have the slightest clue on how much I need. At a surface level they seemed like one and the same; “I need as much as I earn”. But it is this exact mindset that keeps us stuck in a the endless cycle of monotonous working and frivolous spending. It also breeds a scarcity mindset; that no matter how much money I make, it will just enough to get by on.
Why is it that we know exactly how much we earn each year, but don’t have the slightest clue how much we need? I think part of the answer is because it is complex to calculate. We first have to know our income after tax, then deduct the savings that we still have in the bank account (which is hard to separate from previous years savings), then deduct any other non-critical frivolous spending, or investments, loans, etc. It becomes such a mess that we eventually give up.
It’s hardly surprising that most of us suck at financial planning, since we don’t actually know what we should be planning for. This is the equivalent of packing for a holiday without knowing how long, or where, you are going–you end up having to pack as much as possible. This same problem occurs financially, we don’t really know how much it costs to live, which means we just plan on making as much as we can, just in case.
What happens if we start from the other end of the equation? What if we know exactly how much we need to live each year? What if rather than focusing on our Salary, we focused on our Expenditure. What if at a party instead of hearing, “Did you hear that Bob just got a raise to 180K?” We heard instead, “Did you hear that Bob got his Expenditure down by 6K?”
Sound ridiculous? Maybe it isn’t.
Minimum Livable Income (MLI)
MLI is the amount of money that you need to earn yearly in order to sustain your current quality of living (and put away savings for the future).
MLI = Living Expenses + Savings + Tax
Calculating your expected MLI is as simple as opening up a spreadsheet (like this one) and jotting down all the expenses that you incur over a year; add in your tax rate and any retirement (end of life) savings that you want to commit to. Wallah! There you have it. The amount of hard earned cash that you actually need to turn over in a year.
What is sure to surprise you is that it is a lot lower than expected. I calculated what my MLI would be for an “ultimate year”, that being 6 months travelling abroad + 6 months living in Australia and it turned out to be $41,262 (without super). That’s not far from minimum wage ($34K before tax) and we are talking about a lifestyle that corporate suits dream about during their 15-minute lunch breaks. Depending on your level of “comfort” (read: extravagance) it doesn’t cost that much to sustain yourself. Obviously I’m being facetious in that I am a single introverted male who spends most of his time reading and writing (low entertainment costs). Regardless, I still think that most people’s MLI would surprise them.
What is even more surprising–and this is where it gets really interesting–is that when you calculate how many months it would take to earn your MLI, it is unquestionably going to be less than 12. Unless you are currently living on unpaid credit card loans, then your current income is always going to be greater than your MLI (else you would be starving and/or homeless).
If your MLI takes eight months to earn, then the gap (four months) to the end of the year, you are working without purpose. Sure maybe you are taking those savings and putting them into a ludicrous investment, but in reality, you are probably just squandering them on useless purchases.
Surplus is good; unmanaged surplus is wasted.
The thing that should be stinging deep when you realise this, is not that you are wasting away some money, but rather, and far more depressingly, that you are wasting away some life. Those extra months of nine-to-five work that fill your mind with dread come Sunday night, are not required. You did them for some shitty purchase that you didn’t even want; for drinks with work friends that you don’t even like. Cynical? Ofcourse.
Where to Next?
So let’s pretend we all know exactly what our MLI is, what now? This change in mindset can open countless windows of opportunity.
Most preferable, if you are a freelancer, you simply don’t have to work for the rest of the year. You can travel, pursue life interests, grow in areas outside of your professional domain. You can rearrange your working life to be a 4 or even (gasp) 3 day work week. You can spend more time raising a family, reading books, building bicycles, or whatever it is that makes you tick.
Unfortunately we don’t all have the luxury of being well-paid Freelancers. Most of us work full-time jobs that require us to work the whole 12 months. Here are some of the common hesitations about what to do once you have met your MLI:
1. “What am I doing with the rest of my money?”
After you calculate your MLI the first thing you realise is that you are probably wasting a lot of money on “unnecessary” things. If it only costs you $35K to live, where is the rest of your $70K salary going? Stop exaggerating, you are only paying $15K in tax. You are squandering 40% of your MLI on useless shit.
2. “I can’t just work until I reach my MLI and then stop, they would fire me!”
Would they? When was the last time your salary review went like this:
Boss: “You’ve done some great work this year Dave. We really love having you onboard the team. We want to give you a 5% salary increase.”
Dave: “That’s great to hear, I really love working here too. I feel I am able to get a lot of meaningful work done and really enjoy the culture. However, I want to ask for a pay cut instead. I want to reduce my salary by 10%, but I also only want to work 9 months out of the year. I’m happy to split this up to minimize the effect on the company, or even structure it as a 4 day work week. In essence, I’m earning enough to reach my MLI and would like to spend a bit less of my life working, and more of it living.”
Probably never right? Would it work? Depends on your boss. It definitely feels counter intuitive; earn less? What!? That means I’m going backwards in life, that means I’m a failure. It sure does, if by failure you mean a lower earning, but higher satisfied human being who enjoys the growth that a professional career brings, while also thriving on the creativity and freedom of spare time.
3. “But what am I going to do with the rest of my time?”
This question is great at highlighting a very important human contradiction, I would say the human contradiction: we complain about having to work so much, until we have time off, then we get bored and wish we had some meaningful work to do. The meaning that we receive from work represents a huge amount of our self worth. When we don’t have work, we feel bored and worthless. If this question is really your big blocker, then MLI really isn’t for you. But you are also vetoing your rights to complain about work ever again, because you have chosen to be there for the sake of preventing boredom.
4. “But my company wouldn’t be able to get by without me working full-time!”
The idea that businesses can’t survive with employees working anything less than a 40 hour work week is the biggest lie I have ever heard. This implies that everyone spends the whole 8 hour work-day being productive. Bullshit. Most people don’t get more than four hours solid work done a day. A huge amount of time is wasted away in office socializing, power politics, mundane meetings and futile facebook (demotivation).
Don’t agree? What about those days when something unexpected came up in the morning and we arrived to work a few hours late. Knowing we need to “catch up”, we put on our headphones and blast through a full day’s worth of work in half the time. We feel great for being so productive and wonder why we ever need the whole eight hours; we don’t.
So what do you think about MLI? Brilliant or incredibly naive? Let me know in the comments.