It’s not hard to find articles today on topics of saving energy under the title of sustainable living. While we admire “being green” and using less physical resources for our daily activities, we find the biggest question for individuals that have achieved an above average level of wealth often encompasses the question of “how much is enough”? Having enough financial resources to sustain a desired lifestyle is the goal yet it is not uncommon to have an incomplete understanding of the realistic amount it takes to live and therefore what a realistic target is. If we don’t understand the intricacies of our monthly or annual “burn rate” it is very easy to deceive ourselves of the true nature of our progress towards financial independence.

For example, it is very easy to under-estimate the actual “burn rate” by discounting so called “one-time events”. These are often things like car purchases, home remodeling, moving residences, weddings, divorces and other special occasions in our lives. These events can often be serial one -time events. The denial created by one event, a wedding for example, will lead to rewarding ourselves with another “one-time event” since we were denied by the last one. This bingeing and purging financially often leads to the conversation “well we did this last year and we don’t expect that to happen again” and ultimately under-estimating the true nature of our burn rate.

The good news is for those who have achieved an above average level of success in income or in investment assets (excluding personal residences, toys and other “stuff” accumulated) the need to budget to get by has passed. Thank goodness! But to accurately compare our investment assets to our lifestyle requires a good sense of how much is actually being consumed to support a comfortable standard of living.

There are two processes to get “the number”:

The first is:

Break out your credit card bill, checks and cash expenditures into categories to have the ability to review and compare lifestyle expenses. Examples of categories are clothing, food, eating out, vacations, automobile expenses, work expenses, home improvements and events like the wedding and other major family celebrations.

Next is to review the spending with a critical eye. Not critical in the sense of you did something wrong but critical in the sense of did the expenditures truly add value to your life? Don’t be surprised to find you have spent financial resources on items, that upon review, you would not do again. That is okay to find out but if you keep repeating these types of expenditures, some of which are being charged automatically to your credit card(s) or bank accounts, that would be wasting valuable financial resources. This critical review should provide guidance in two ways. One to heighten your awareness of any dysfunctional spending habits and develop plans to adjust them to fit your values. The other is to examine patterns in your one- time expenses account for over time. For example, a one-time purchase of a new car and you get a new car every 5 years, should be amortized and added to your base line number.

This should result in a lifestyle expense number. The next is to apply the “acid test” to your sustainable lifestyle number by going through the following formula:

Annual Income from all sources

Minus Income Taxes and Social Security Taxes (FICA)

MinusAll Savings and Investments

Equals Net “Burn Rate”

This next needs to be compared to the “actual expense” process above. If your numbers are not close you are very likely fooling yourself in some way. A reasonable question is why not just use the second method? Certainly it can be done but that will not allow for a more critical “did this expenditure add value to my life” perspective.

Okay, so now you have found a realistic and sustainable lifestyle number, now what? Determining what amount of investment capital that will provide an adequate and sustainable source of cash to meet ongoing needs is critical and that will be the subject of a follow-up post “Assessing the Adequacy of a Sustainable Financial Independence”.

The foregoing content reflects the opinions of White Oaks Wealth Advisors and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.

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