Hey!
There’s something I want to shock and share with you today during this post and I hope it’s going to give you a new perspective and outlook on your life. I hope it gives you the feeling of a new exciting chapter right ahead of you if you’re willing to step into the shoes of the person you know you are meant to become. How does that sound, intrigued?
Let’s do this!
So the deal breaker is this, you don’t need a milly in the bank to set you free from your hideously tedious 9 to 5 that you can barely turn up for on-time 5 days a week because it drains your body mind and soul. The math that is needed to effectively determine how much of a cash buffer you’ll need is so simple that you’ll kick yourself once we’ve run through it in a moment and regret not reading this post sooner.
So how do we estimate effectively how much cash we’ll need in the bank to get us out and set us up for the best chances of success? Well, the one thing that you’ll need to know is your monthly and annual expenditures because if we don’t then we don’t have a hope in hell of escaping the rat race, period.
Monthly expenditures count as everything that goes out of your account every month without fail, such as…
– Direct debits (Phone, Netflix, Car Finance & Hello Fresh)
– Rent / Gas / Electric
– Fuel
– Food
Annual expenditures count as one-off payments that go out once a year such as…
– Car insurance
– Car tax
– Mot
– Car servicing/repairs
– Council tax (this could also be monthly)
– Holidays
– Heating oil
The lists are both endless and will differ from person to person and there are no right or wrong answers, but we need to make sure we list everything that we spend money on accurately as we don’t want to leave ourselves short when calculating our cash buffer.
Once we have totted up all of our expenses we need to add them all together to get our correct monthly figure. We’ll end up with 2, one being slightly better than the other. Here’s an example below to help explain the process.
Monthly
– Phone £40
– Netflix £11.99
– Car Finance £300
– Hello Fresh £49.99
– Rent / Gas / Electric £600
– Fuel £80
– Food £100
Total monthly expenses: £1,181.98
Annually
Car insurance £300
– Car tax £80
– Mot £30
– Car servicing/repairs £200
– Council tax (this could also be monthly) £1600
– Holidays £2000
– Heating oil £450
Total annual expenses: £4,660
So we know based on the figures above our monthly outgoings are £1,181.98 which is ok but it doesn’t paint the best picture when trying to estimate a long term cash buffer as it hasn’t taken into the annual expenses that we incur such as the holidays, car insurance and council tax for example. So what we need to do now is do the equation below.
£1,181.98 (monthly expenses) x 12 = £14,183.76 (12M of expenses)
£14,183.76 (12M of expenses) + £4,660 (annual expenses) = 18,843.76 (M+A expenses total)
£18,843.76 (M+A expenses total) / 12 = £1,570.31
As we can now see £1,570.31 is our correct monthly outgoings figure based on our complete set of expenses being incurred annually divided by 12 to give us a better forecast when deciding on how much our cash buffer needs to be.
For quick reference here a cash buffer should be no shorter than 3 months depending on your risk tolerance and how quickly you think you’ll be able to replace your income after leaving the 9 to 5. I left my job with a larger cash buffer because I had a lot fewer outgoings after scaling back my expenses radically (I went into what I now call “monk mode”) compared to the average joe, therefore, my buffer has taken me a lot further and got me out quicker. A good cash buffer I believe is anywhere between 8-12 months because it allows for some hiccups along the way as all will not be plain sailing as you can well imagine living life in the fast lane.
So to move us to the last stage of this post, knowing exactly how much we’ll need to get us out of the uninspiring 9 to 5, we’ll need to decide on how much is the right amount we’ll need in the bank to allow the animal brain to chill out and think clearly and make sound business decisions once we’re out and riding solo and are in control of how we make our income. There is no right or wrong answer as it’s what you feel comfortable with and how quickly you want to get out and start providing value to those around you doing something you have a passion for whilst creating TIME and FINANCIAL FREEDOM for yourself in the long run.
Once you have completed the steps above, got your correct cash buffer figure saved up and in the bank ready to be deployed to pay those pesky bills, it is only at this point you should be looking to exit your uninspiring 9 to 5 and begin the next stage of the journey or creating time and financial freedom which we’ll be discussing soon.
I hope you got value from this post and it’s given you a lot more food for thought. I hope of course it’s inspired you to what is achievable if you put in the work to get that cash buffer saved up asap as you could be living a very different life in months from now, all because you decided to chase a new and exciting life for yourself.
Lucas Newton
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