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What it Takes to Live Your Dream

In today’s busy world, it’s easy to lose sight of your dream and instead become distracted by daily joys, pleasures, hardships, and worries. After all, when was the last time you thought about your dream life? Are you actively working towards it? Perhaps you are already living it? (Just to be clear, when I refer to living your dream, I mean living your ideal lifestyle.)

If you’re like most of us, you’re not quite living the life of your dreams (yet), and the reasons may include a lack money, lack of time, being afraid of what others may think, or perhaps being too comfortable where you are already (heck, who needs a dream when you’re fine just where you are?).

Although the emotional roadblocks (e.g. fear, comfort) are very real, they are difficult to quantify. Instead, we’ll focus on two quantifiable dimensions to all our dreams: the money required to live the dream, and the time it takes for you to accumulate the money.

Three Questions to Ask Yourself

Peter Kinch, the author of The Canadian Real-Estate Action Plan, first asks his readers to stand back and look at the bigger picture. In your mind, paint a picture of your ideal lifestyle. What does it look like? Once you’ve got a relatively clear picture in your mind, try and answer these three questions:

  1. How much cash do you currently have available for investing?
  2. How much cash would be required to live your ideal lifestyle, annually?
  3. When do you hope to start living your ideal lifestyle?

Your answers to these questions will be used to figure out what it takes to live your dream.

(Be honest with the second question! Does it include spending half your year living abroad? Owning a lamborghini aventador? Annually donating exuberant amount of money to an animal conservancy while living in Santa Monica?)

Looking at an Example

Judy is a closet artist who has managed to save $100,000 in her bank account, and she is not entirely happy with her life as a high-school teacher. She dreams of traveling the world, supporting her favourite charities, and making money by knitting quilts, which has always been her true passion. She would like to know what it would take to live this dream in 7 years.

  1. Cash available for investing: $100,000
  2. Cash required to live her ideal lifestyle each year: $70,000/year
  3. When she hopes to start living her ideal lifestyle: 7 years

Result: To live out her dream, Judy requires a 36% return on the initial investment of $100k and generate a total of $875k in savings (see calculator below).

This is where you may be thinking Wow! That is a ridiculously high return! 36%? Impossible! Not even Warren Buffet can get return that in the markets!, but there’s more than meets the eye. This required return does not need to come solely from investments, but rather from a combination of both savings and investments over the 7 years.

What does a 36% return mean for Judy? She would have to generate $36k after the first year. $49k after the second year. By the time the final seventh year rolls around, $233k would need to be generated (probably almost entirely from investments)! Adding the numbers with her initial position of $100k produces the grand total of $875k. That’s Judy’s target. If she has $875k in her bank account then she’s ready to live her dream.

The Triforce: Savings, Investments, and Time

Judy has 7 years to come up with $875k, how does she do it?

Judy has many options. One option would be to save $72k per year (yes, that’s a very high number, even for a teacher!), and average a 10% return on her investments. Another option would be to save $40k per year and invest her money in a manner that averages her a 20% return on her investments. Wow!

The point is that Judy’s required return (36%) does not need to come entirely from her investments, but also from savings. Obviously Judy’s goal is very ambitious, and she needs to carefully cater her strengths towards accomplishing her goal. Is she better at saving, investing? You may be thinking to yourself that her time horizon (7 years) is probably too aggressive for her situation. It’s true that she also has the option of waiting (i.e. delay her dream). But come on… this is her dream! How long should she wait?

Instead of delaying her dream, Judy has a plan. She is confident that she can get a 10% return from investing in real-estate, another hobby of hers. She is also willing to increase her income by selling quilts on the side. Furthermore, she plans to cut down on her expenses by quitting smoking and cooking at home. She finally decides to sell her car and instead bike to work. If, by doing all these things she manages to save $72 each year, then she will reach her target in 7 years and live her dream!

Be encouraged! The ideal lifestyle you painted in your mind is possible. It boils down to just three forces: how much you save, how well you invest, and how long you’re willing to delay your dream. These forces all work in tandem. What do you think, will you be able to live out your dream?

Note: In this article I have purposefully neglected the consideration of taxes and market swings. Taxes depend on your locality and it is easier to plan using historical market rates of return.

What About Your Dream?

Use the calculator below to find out what’s required to live out your ideal lifestyle.

Capital available for investing: $
Ideal lifestyle annual cost: $/year
When to start the ideal lifestyle: year(s)


 

Magister

Trying to succeed without studying is like trying to build a house without a hammer.

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