So you put in all the hard work to figure out your yearly income and yearly expenses. You have an estimate of the amount of money you need to save before your Year Off. What to do with all this great information?……..
Calculate your Year Off Age!
Your Year Off Age is the age you put your working life and career on temporary hold to pursue whatever dreams you have. You are on solid financial ground and have no debt obligations. You have a good start on your retirement savings, and you have enough money to finance your Year Off.
This calculation is an estimate, but also your goal age to take your Year Off. I want you to look at it as a goal. Once it’s calculated, say to yourself “I will have enough money saved to take my Year Off at the age of xx”. Write it on a piece of paper and place it on your fridge or mirror or car dash-board so you see it every day.
Now let’s walk through the step by step process of calculating your Year Off Age.
Grab a pencil and piece of paper to write this all down.
Step 1: Add up all your assets
- Checking account
- Savings account
- Brokerage account/mutual funds
- 401k/IRA
Do not include any material assets, like a car or valuables.
Step 2: Add up all your debts
- Student loans
- Car loans
- Credit card debt.
Do not include mortgage debt if you have it.
Step 3: Add up all the money you will need saved by the time you take your Year Off
- Emergency Fund – $10,000
- Year Off funds – $40,000
- Retirement Savings – one year’s salary in a 401k or IRA
I explain the reasoning behind the above mentioned amounts in the post How Much Money Is Needed for a Year Off, so go back and read it if need be.
Step 4: Calculate how much more money you need to save beyond what you already have saved.
Add up the figures from Step 2 and Step 3, then subtract the Step 1 total. This is your total debts plus total money you need to save, minus your total current assets.
Step 5: Calculate the amount of money you’re able to save per year
This is your yearly take home pay (after taxes, 401k/IRA contributions, and health insurance) minus your yearly expenses. You calculate both of these figures in the post Calculate Your Income and Expenses so go back and read it if need be.
Step 6: Calculate how long it would take to save the amount of money you need before your Year Off
Divide the total amount of money you need to save (the total from step 4) by the amount of money you’re able to save per year (the total from step 5) to give you the total number of years needed to reach these savings goals.
Step 7: Calculate your Year Off Age
Add the number of years from step 6 to your current age to get your Year Off Age. This is the age you will be financially sound enough to make the big decision to step away from work and the 9-5 grind and do something incredible!
Let’s go through a quick sample calculation:
Bob is a 24-year-old making $75,000 a year.
Step 1: Bob has no assets to speak of = $0 in assets
Step 2: Bob has the following debts: $50,000 in student loans and $10,000 in car loans = $60,000 in debts
Step 3: Bob will need to save the following amounts of money: $10,000 for an emergency fund, $40,000 for the Year Off, $75,000 in retirement savings = $125,000 of savings needed.
Step 4: Step 2 plus Step 3, minus Step 1: ($60,000 + $125,000) – $0 = $185,000 savings needed between now and when he takes his Year Off
Step 5: After taxes, 401k contributions, and health insurance, Bob takes home about $52,500 of his salary. His yearly expenses are $26,400 ($2,200 per month): $52,500-$26,400 = $26,100 a year saved
Step 6: Step 4 divided by Step 5: $185,000 divided by $26,100 = 7 years of savings needed
Step 7: Bob is 24 years old so his Year Off Age is 24 + 7 = 31 years old
This means that if Bob accumulates no other debts, continues to take home the same amount of money per year after taxes, and keeps his budget the same during this whole time frame, he will have a year’s worth of salary saved in a retirement account and have enough money to finance his Year Off by the age of 31.
The total amount of money you need to save before your Year Off is a large sum.
It’s larger than any amount of money most young professionals have ever seen. This can be discouraging at the start, but once you go through your calculation, you’ll see that it’s attainable. All it takes is time and delayed gratification, and you’ll eventually reach the point when you can take your Year Off.
And if your Year Off Age is much higher than you want, don’t automatically assume you can’t pull it off.
Just jump right into taking the necessary steps to get your life in order. Start cutting back on your spending. Find a second job. Move out of your expensive apartment. Sell your expensive car. Do anything to get you moving in the right direction, then recalculate your Year Off Age and see how much it’s moved. Before long, you’ll have a good amount of momentum going and you’ll be well on your way to your Year Off goal.
Many of the dollar amounts from your Year Off Age calculation can be adjusted up or down accordingly.
For example, instead of living off $2,200 a month before your Year Off, try to live off only $1,700 per month. Instead of making it a goal to save 1 year’s salary in your retirement fund, make your goal $50,000. Instead of taking a full Year Off, take only 9 months. Maybe your Year Off plans don’t need $40,000 but only $30,000 to do everything you want to do. Can you eliminate some debt by refinancing your student loans or selling your expensive new car for something cheaper? Can you make more money by picking up a side job?
All of the above actions will get you to your Year Off Age sooner. The temptation will be there to spend more, but with delayed gratification, you can get to your Year Off Age a lot sooner than you think!
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