How Much Money Would Change Your Life?

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How much money would change your life? You may need less cash than you think to make your world much different.

In January 2016, three winners split a record $1.6 billion Powerball jackpot. That works out to about $533 million per winning ticket. That amount of money would change almost everyone's life, whether they're unemployed or a high net worth individual with $5 million.

Most people won't see a fraction of that money in their lifetimes, although many of us still play the lottery occasionally—or look for that one-in-a-million stock chance that'll earn us millions of dollars seemingly overnight. It's fun to dream, but what if our real financial goals were more realistic?

What Do You Need to Spend Every Month or Year?

While some people offer advice like Mr. Money Mustache, where spending as little as possible and saving as much as possible could lead to a dramatically early retirement age, most people aren't wired to do that (or are too old to retire before 40).

You have to understand your financial position and set realistic goals. Perhaps you do want to retire at 50. Perhaps you want to pay for long-term medical care after age 65. Perhaps you're saving for a house or college or a trust fund for relatives or charitable good.

Before you can figure out what amount of money will change your life (and it's almost certainly less than half a billion dollars), you need to know what your life costs right now.

Do you pay rent? Do you have a mortgage? Roughly how much do you spend on essentials every month? This could account for everything from food to clothes to insurance to annual fees. Knowing these numbers gives you a bare minimum amount that you'll need to survive. (You have to account for inflation over the long term, of course.)

Start with this number.

What "Bad" Debt Do You Owe?

The next number you need to figure out is what it'll cost you to get out of debt. This can include everything from balances carried on personal credit cards to car payments to student loans.

Suppose you're paying $800 a month to one credit card and one car payment. You own $12,000 on both of those together.

If you could somehow pay off that $12,000 all in one swoop, you'd have an extra $800 a month to spend or save or invest.

That's your first number. The first dollar figure that would change your life is the amount it would cost you to pay off all debt on depreciating assets.

Debt on depreciating assets means that it's not really an investment. Your car's probably not getting more valuable over time. You're not increasing your equity the longer you hold on to it. Some people classify this as "bad" debt for this reason.

What "Good" Debt Do You Owe?

The next category of debt reflects debt on appreciating assets, such as a mortgage.

Suppose you pay $1,200 per month toward your mortgage and owe $80,000 on it. If you could wipe out that $80,000 immediately, you'd free up $1,200 every month ($14,400 every year) to save or invest or spend. Even better, you'd still have the equity of your house as well as any appreciating value of that equity.

Some people classify this as "good" debt, because the underlying security (the house and land) tend to increase in value over time at a rate higher than your interest payment on your mortgage. This doesn't always happen, but it's been mostly true for many people in the United States since WW2.

The second dollar figure that will change your life is the amount of money it would cost you to pay off all debt on appreciating assets.

If you're freed up $2,000 a month between the first and second categories, you've freed up $24,000 a year. At a pay rate of $12 per hour, that's a full-time job.

How Much Do you Need to Maintain Your Lifestyle?

So far, these two numbers together are less than $533 million dollars, and probably much less than $1 million. If you won a $1 million Powerball jackpot, you could change your life in a dramatic way!

You'd still probably have to work to maintain your lifestyle, however. The third number is the amount it will take to produce slightly more than you need every year without touching the principle of your investment.

Suppose you've done the numbers. Once you've paid off your appreciating and depreciating debts, you need $50,000 a year to maintain your lifestyle. You go out to eat, take a nice vacation, buy new shoes every year, and pay your property taxes.

How much principle do you need to invest to generate $50,000 every year after taxes and inflation?

You probably don't want a risky investment, so shy away from stocks. (Even a great investment like the S&P 500 index fund can have off years, where it returns a negative amount, not the 6-8% it has historically provided). If, instead, you put your money in bonds, you might get a more stable return, even for a lower payout.

If you looked for municipal bonds, you probably wouldn't have to pay federal or state taxes, removing one headache for you. Suppose you can find a good portfolio of municipal bonds paying a 4% annual return. That's a decent rate and a safe investment and perhaps even avoids taxes.

The third dollar amount that would change your life is the amount you'd have to invest at 4% in municipal bonds to return the necessary cash every year. For that $50,000 you need a principle amount of $1.25 million dollars.

(In practice, you probably want a little more than that to deal with inflation and taxes and incidentals and the possibility you'll find a much better bond at 3.5, but given that you're reading investing advice, would you really stop doing anything and never earn any money ever again if $1.25 million fell into your lap?)

A million dollars is a lot of money, but it's also not an exorbitant amount of money. It's not mega lottery jackpot money. If you work hard, save well, and invest well, that dollar figure is within your reach within your lifetime.

It's fun to dream big about huge dollar figures written on oversized checks, but the kind of life-changing financial independence most people dream about will cost far less than they imagine. Generating a million and a half dollars in one shot to do everything may never happen, but you can make amazing progress toward all three goals now. You have the power to change your own life and your financial future.

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