Can you spend this way your whole life?

Nima Abu Wardeh asks readers to analyse how much they will earn during their lifetime and then calculate how much of that income they will set aside for their future. Is it enough?

Illustration by Gary Clement for The National

Public service announcement: reading this article is going to hurt. Your emotional well-being is at risk.
Even though this might depress you, I'd like you to please spend the next few minutes working out how much money you have earned over your lifetime. Just a ballpark figure.
Whatever you make for a day's work, chances are you'll be surprised by what transpires. It's probably a small fortune.
You'll most likely be asking yourself: "Where did it go? "What do I have to show for it?"
How much you made isn't the main focus today. My hope is that you come away with another perspective on money, life and what you value.
A lot of what you earned went on paying rent or a mortgage, buying food and having fun. Maybe you bought valuable possessions too.
But what about savings? Investments? There was definitely money left over after your life's basic expenses.
Now add up what you own, have invested in and what you have set aside. Is it the equivalent of 20 per cent of what you made since you started being paid an income? If not, then what proportion?
This sobering exercise is what I get people to do after we work out how much money they would need to have stashed away if they were never to work or earn again - whether enforced or by design. Stick with me and you'll see why.
The value of your retirement fund depends on many variables, such as where and how you end up living, what you'd eat and do in the way of entertainment and hobbies, and whether you have dependents or not.
Let's assume you want to live as you do today, forever. This is how you work out the lump sum you would need:
You add up all your expenses over a year - and I mean everything - and multiply it by 25.
It's based on the so-called safe withdrawal rate, which is set at 4 per cent.
This is how it works: if you have that (massive) lump sum set aside, in theory the interest it would generate would allow you to withdraw 4 per cent of it every year without the capital being depleted.
Ergo, no matter how long you'd do that for - how long you live - you'd have that 4 per cent every year, for life.
The lump sum is a significant amount of money, no matter how frugally you believe you will live when the time comes.
Doing the figures with today's expenses serves two purposes. One is that it familiarises you with a way of working out the maths. Two, once you're over the initial shock of how large an amount it is, chances are you start thinking of what you can cut back on - and that's a good thing. This is where a shift can happen regarding our relationship with what money means to us and what it can give us.
People who go through the exercise say the figure scares them, that they feel they will never be able to have so much money in their life.
Next we look at how much money was earned throughout their lifetime. And compare the two.
The point is, you do earn. But what do you do with the money?
Let's look at some stats, using incomes in the United States as the example simply because figures are readily available. According to the US Census Bureau figures for August of this year, the average salary in America is $43,000 a year.
Assuming this stays the same throughout the working career of 40 years, as a rough way to account for inflation, then the average American would earn $1.72 million in their lifetime.
How does this compare to your earning power? Do you get double? 10 times as much? Half as much? Adjust your figures accordingly.
Now let's see how much they have to show for what they earn. The graphic to the left shows us the median net worth of Americans in various age brackets for September last year.
How does your figure for your age group compare to you?
You might be very happy with what you find out, but it's more likely that you won't be.
Whatever the figure is, don't let it depress you - what's done is done - but do let it inspire you to do better, starting today. Having a financial goal - be it short term or longer - often helps. What's yours? The bottom line is: think before you spend and keep more of what you make. Yes it's that simple.
Nima Abu Wardeh is the founder of the personal finance website cashy.me. You can reach her at [e-mail] and find her on Twitter at @nimaabuwardeh
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