You’ll rev up your Money Machine – your well-oiled piece of equipment that churns and burns as it works for you, even when you don’t – by first creating what I call “dignity مكن عد و فرز.” This is the calculation of money you’ll need down the road in order to live a very minimal, luxury-free life each month. It’s your insurance, so to speak, against destitution – or ‘bag lady’. You can figure out how much dignity money you’ll personally need by determining the smallest amount that it will cost you to live each month. Add up what you spend each month for food, transportation, taxes, housing, telephone, utilities and insurance. Don’t include any frills.
One very important basic is your home. If you own your house or apartment, your mortgage or maintenance is likely to be one of your major expenses; it is perhaps your single greatest expense. Paying off your mortgage greatly reduces your monthly outlay and therefore reduces your total dignity-money requirement. For many women, eliminating mortgage debt is an essential step to achieving financial independence. Calculate your dignity-money needs both ways-with a mortgage and without. Depending on the current size and condition of your Money Machine, you may find that financial independence may arrive for you only after the mortgage is paid, whether that date is five, ten, or more years from now. Of course, the sooner the better!
Your dignity-money calculation can be a rough number; that’s okay. It might be $1,000 a month or $10,000. Each person’s sum will be different. In any event, your dignity-money figure is the target level of income for the first stage of creating your financial freedom. Your goal is to generate this amount of cash from your Money Machine each month going forward so you won’t have anxiety about the basic care of yourself in the future. If you already have your dignity money, then you can feel at ease. Knowing that you’re financially secure should give you a good feeling all over and relieve whatever stressful flutters you might have had about money. If you have yet to establish your dignity money, then it’s time to begin working toward it. Believe me, no outing, new trinket, or other toy is worth the cost of not taking this step.
How do you figure out how much your Money Machine needs in order to generate your dignity money? The calculation is simple. Multiply your monthly dignity money number that you’ve calculated by 12; then add a 0. This provides an estimate of how much money you’ll need to invest in order to generate the appropriate monthly income. For example, if your minimal monthly expenses are $4,000, then multiply $4,000 by 12 and add a 0. That means your yearly expenses will total $48,000. Your Money Machine will need $480,000 in order to provide you with dignity money.
Why? At $4,000 a month, your yearly expenses will total $48,000. The rate of return on investments varies, of course, but history shows that a conservatively well-tended Money Machine should yield approximately 10 percent each year. This means that your Money Machine will need $480,000 in order to pay you an annual income at the rate of 10 percent per year, or $48,000.
The same formula-monthly expenses times 12, plus a 0-works for any expense level. If your minimal monthly expenses are $6,000, your Money Machine should contain $720,000: $6,000 times 12 is $72,000; adding a 0 brings it to $720,000. If your monthly expenses are $1,500, then you’ll need $180,000 in your Money Machine. Do your own calculation.
This calculation requires one important adjustment-deductions based on the inflation rate. Inflation gradually shrinks your money’s value. Therefore, whatever figure you compute will be worth less in the future. Consequently, the amount in your Money Machine will have to be somewhat greater to compensate for the effects of inflation. Unfortunately, no one can know for sure how high the inflation rate will be in the future.
A high inflation rate, like the one we experienced in the 1970s, will have a strongly negative effect on the value of the money generated by your Money Machine. The moderate inflation we’ve had so far during the 1990s (averaging around 3 percent a year) isn’t nearly so powerful. The power of inflation grows significantly as time passes. If you are only one or two years away from the time when you plan to ease out of working, inflation will have little effect on your plans. But if you expect to work for two or three more decades, inflation will make a noticeable difference.
Let’s say you calculate your dignity money to be a whopping $600,000. That seems like a lot of money to feed to your Money Machine, and the thought of how to amass such an amount might be daunting. But if you save this $600,000 gradually, rather than all at once, it will be much less intimidating.