This is the exciting part of the Voluntary Work concept – turning paid work into an option rather than an imperative.
The formula is very simple.
In order for paid work to become optional, you need enough non-work income to comfortably cover your expenses. In a simple equation:
Non-work income > Expenses
I like the equation because it highlights that there are two sides to this – you can make the equation balance by reducing expenses, and by increasing your non-work income.
In my opinion, reducing expenses is by far the most important side of the equation, at least initially, as every dollar you DON’T spend is another dollar available to save or invest – that is, reducing expenses directly assists you in your goal of increasing income, as well as reducing the amount of non-work income you will need.
Here’s another equation, from Jacob at ERE. Here, Jacob has assumed a typical modern investment portfolio, which I don’t believe to be the best option. However, for the purposes of this discussion it will do fine. He explains at his blog that it is possible to stop paid work when you make this equation true in your life:
Annual expenses < 3% of invested savings
Please visit his blog for an explanation of the 3%, which some early retirement authors consider is actually more conservative than necessary (that is, they believe you can have a lower level of investments).
I actually prefer to say this one a different way.
If my expenses must be less than 3% of my invested savings, then my invested savings must be at least 33 times my annual expenses.
Following on from that, every thousand dollars that I prune from my annual expenses means I can cover them with $33,000 less in invested savings. And every thousand dollars I add to my annual spending means I need to save another $33,000 to cover it.
If I am using $20,000 every year to live, then I need $660,000 in invested savings to cover that with non-work income. If I am using $30,000 every year to live, I need $990,000 invested. If I am using only $10,000 per year, I only need $330,000 invested.
If this idea is new to you, I think it’s worthwhile reflecting on it for some time and considering the implications in your life.
A weekly meal out for $30 translates into roughly $1500 per year and therefore will require $50,000 in invested savings to cover it. A $20,000 car you replace every four years is costing you $5000 annually in depreciation alone – the savings ‘price tag’ is $165,000. Cutting your grocery bill by $10 weekly means an annual saving of $520 and therefore a reduction in invested savings of $17160.
I have a spreadsheet into which I entered all of the recurring expenses I could think of in our life, with the amount and the frequency – replacing the refrigerator, washing machine, car etc; groceries; medical; and so on. From this the spreadsheet calculates the cost per year for each item, and then multiplies that by 40 (I prefer a wider margin than Jacob uses) to show me the invested savings required to fund that item. I found this a very useful exercise, and can share it if people are interested. I always know within a couple of thousand dollars what we are spending annually, and I use that number often e.g. when evaluating investments.
This rule of thumb – ‘investments must be at least 40 times annual spending’ – is very handy and becomes interesting in a different way as your savings increase and your spending decreases. It’s fun to look at items and see how a one-time purchase can actually reduce the need for savings e.g. one pair of $200 boots that will last 10 years vs $50 boots that will last a year. Sometimes spending more can reduce your need for savings.
Looking at spending and income in these ways provides another lens through which to look at the financial world, and your spending.
More easy ratios to come in a future post on numbers for Voluntary Workers.
And in part two of this little series, I will expand on the other parts of the puzzle – frugality, debt, saving, investing and (of course!) working.