Determining your spending needs is darn near impossible because all of us “need” very little to survive. For millennia, the average person in the world lived on the equivalent of one dollar a day. Only during the industrial revolution did standards of living start rising significantly above that, and only in some countries. Even today, millions of Americans are living on nothing more than their Social Security benefits, which average less than $1,200 a month. So if financial independence just means enough to survive, you’re probably already there. Congratulations!
So let’s get more practical. What you’re trying to discover is the spending level you need to live in reasonable comfort, which means to be able to pay your basic expenses and enjoy a reasonable amount of the best things in life that happen not to be free, and the number has to be your own, not an average.
Since this site is SimplyRich, I want to make this as easy as possible. If you love budgeting, be my guest: determine your expenses by category based on the careful records you already keep of spending. Delete the costs that would disappear if you weren’t working. If you’re reasonably happy with your financial lifestyle, you have your spending number. If not, guess how much you’d have to increase costs in various categories to be satisfied. This is not a wish list, though, so don’t include “if I won the lottery” fantasy expenditures to buy a baseball team or have your ex-boss killed.
Most people, however, hate keeping track of spending in detail. I have two alternatives to offer. The first is to sign up at Intuit Mint. This is a free service that can grab all the information from your bank, credit-card, brokerage, retirement-plan, and other accounts and categorize all of the inflows and outflows of cash. If you don’t want to give it any help, they will guess the category of each expenditure, but many of the guesses are pretty bad, and you will want to review and correct some of the classifications. But this will give you an excellent starting point in determining how much you really spend and for what, unless you pay cash for most things.
But even this is too much for me, personally, so I’ll suggest the simplest reasonable approach. Determine the rent or mortgage payment required to live where you would be happy and triple it. That’s your desired cost of living. Because the cost of normal services and the cost of keeping up with your neighbors depend most heavily on where you live, this is a reasonable rough guess of the cash flow you’ll need to create to be financially independent. How much in assets will it take to produce this cash flow? Our next lesson.