According to my SEO professionals, there are a lot of Google searches out there on how to save a million dollars. Many of these searches will have you stumble across financial blogs where so called “financial experts” pawn off sensational stories of uncomfortable austerity and radical savings schemes (or as they think of it, practical advice for you and me). However, if my SEO team is doing a good job, maybe you’ve stumbled across this page instead.

So, what is it about this million-dollar figure that people love so much anyway? Who wants to be millionaire? Well, you can tell Regis that my final answer is “(D) Everyone”, because a million bucks is a lot of money and it’s an amount that would likely change most peoples’ lives if handed to them today. That’s the allure anyway. Financial independence can be all yours with a seven figure savings. Perhaps, but in reality there’s no context behind arbitrarily claiming a specific savings amount as a goal, and that’s not a good thing.

If the goal isn’t a million, what should I do?

Don’t think about a number you’d want saved to be financially independent. Instead, start thinking about what kind of lifestyle you would want to live if you didn’t have to work. Is it greater than how you’re living today? Is it more humble? What kind of flexibility do you want if you change your mind? Can you quantify it? I don’t mess around with these “half measures” of retirement. True financial independence is when work is optional. Otherwise, you’ll confuse no longer working a job you hate for something else.

Now, figuring out what kind of lifestyle you want to live sometime in the future is not the easiest task in the world, especially when you’re younger. Many Millennials haven’t made it far enough in their life to understand what comfortable really means to them. A lot of this comes with experience, which is mainly a function of time. Take those who don’t have children, but plan on having them. I can guarantee you they are going to need to make some lifestyle adjustments. The same is true for those who experience rapid income growth early on in their careers.

Start by Mastering Cash Flow

Just because the future is uncertain, doesn’t mean you can’t begin to provide yourself with enough information to do some meaningful planning around achieving financial independence. Because in order to sock away a million dollars, you’re going to need to save consistently. A great way to start figuring out what’s affordable is by quantifying the type of lifestyle you’re living today.

That’s right. It’s back to basics if you don’t know how much your spending each month on your lifestyle. If you don’t intuitively know these numbers, you will have a very difficult time saving towards you goal(s). Moreover, if you haven’t mastered cash flow, you aren’t in a position to ask how you can save a million dollars in 5 years, how you can save a million dollars 10 years or how you can save any amount of money in any amount of time.

Even after you know these numbers inside and out, there more work to be done. You will need to honestly review what you’re spending your money on category by category, determining whether or not is something that makes you comfortable or if it is excessive. Again, honesty is key. Sure, you can eat ramen, live out of a camper van and extreme coupon your way massive savings each year, but just don’t sell me on that being something we can all universally adopt.

A Tool to Help

If you want some help in becoming a master of cash flow, check out my friends at Tiller Money. I think they have one of the best budgeting and expense tracking systems around. While their budget templates are great, it’s the expense tracking that I am really into. Simply link up your financial accounts and grab import your expense data. Use their “auto-cat” plug-in to make categorizing your expenses a breeze, then view your expense data in what could be considered as good as “real time”. If your lost, there’s literally a video on how to set this all up in 30-60 minutes. I personally reconcile all my expenses each month using it and it takes 20 minutes out of my day.

If you’re new to this process, practice it for at least three to six months, but better discipline is created from reconciling nine to twelve months’ worth of expense data. See if you can stay within your budget by consistently saving a set amount each month (it’s okay if you’re not in savings mode yet, just focus on being consistent with spending for now). Be sure to take into account the seasonality of certain expenses like holiday gifts and vacations in order to arrive at consistent averages for each expense category. Don’t let one-time expenses throw you off. Don’t game the system either by deliberately spending less for the sake of spending less. Once you have this information at your fingertips, you’re in control.

This process takes time because it’s about changing behaviors, which doesn’t get essier as you get older. Having discipline takes practice. It’s a mental game you’re going to have to play again and again. But once you’ve become a master of cash flow, you can make more informed decisions around how you spend your money including allowing yourself to experience a greater lifestyle if you so choose. Don’t let anyone make you feel bad about wanting more. It simply means you’re going to need to increase your income and save more to accommodate that greater lifestyle both today and in the future, which is okay if planned for.

I am a Cash Flow Master, Now What?

After you know your numbers and have demonstrated consistent monthly savings, you can start to play around with some data. I like to start by taking the average monthly living expense figure and multiplying it by twelve to get your annualized living expense. Let’s base our thinking on this number because it’s real, meaning it represents how you are living today.

So, how do feel? Are you just scraping by or are you do you have everything you need? Do you want more, or can you be happy with what you have? Perhaps, you are good right now but will want more later? How will, things will be different if you have kids or when the kids are all grown up?

You won’t have it all figured out right now, but you should think about these things in a way that helps you shape what it is you want for yourself and the good news is that you are no longer operating off some random savings goal. You have a baseline expense figure that provides context to your financial life. For example, if you wanted to have twice the lifestyle you have today when you’re retired, simply double your annual expense figure. You can manipulate this figure as much as you like when creating different retirement scenarios.

Once you’ve come up with some answers, you can plug those number in to any a retirement calculator. In my practice, I use planning software called Money Guide Pro (MGP). It allows me to account for a myriad of variables which go into calculating the probability that you will not run out of money during retirement. Without getting into the weeds, let me share with you the main component that go into the calculation.

When retirement begins and ends

After-tax lifestyle (expressed in today’s dollars)

How much is currently saved and how much is being saved towards retirement

Rates of return before and after retirement

Social Security and other income streams

Inflation

Taxation of investment withdraws

Many planners using software like MGP consider this the best way to look at retirement simulations despite uncertainties remaining. While this is true of any retirement analysis, these tools tend to produce more robust results.

Alternatively, there’s the 4% rule. The lazy man’s retirement calculator. This rule states that you can withdraw up to 4% of your investments without running out of money. So, if you were to save a million dollars, you’d be able to take $40,000/year in perpetuity without ever running out of money. It’s worth pointing out that the this does not take taxes into consideration. Truth is truth, but that $40K is not $40K.

I am not going to knock a generally accepted (and helpful) rule of thumb. While it might not be as accurate as a “proper” retirement analysis (relatively speaking of course), it does help us understand how much you need to save to live off of your investments. Since masters of cash flow already have a solid understanding of their needs, we can apply the 4% rule fairly easily. For example, if the goal is maintaining a lifestyle of $50,000 “forever”, you’d need to have saved up $1.25M.

However, the 4% rule has come under scrutiny when used for retirement periods greater than 30-years, but this has been addressed by some great thinkers in personal finance. Michael Kitces spoke about it extensively on the Mad Fientist’s podcast and concluded that for withdraw periods greater than 30-years, a 3.5% rate should be considered instead of the iconic 4%. So, that same $50,000 lifestyle now requires $1.43M if you plan on a lengthier retirement (again not taking taxes into account).

Conclusion

The notion that you NEED have a certain amount of money saved up by a certain period of time is financial fake news. What you really NEED is to have control of your financial life so that you make smart decisions. Decisions that will impact how to structure your savings in relationship to your lifestyle and goals. Clearly, this goes beyond simply choosing what you spend your money on. It calls into question greater considerations like how make your money in the first place. Nonetheless, it all starts with mastering cash flow and, in a greater sense, mastering your relationship with money.

To echo my colleague Michael Batnick’s take on those seeking FIRE (financial independence retirement early) through extreme austerity and savings, “it’s a personal choice”. But FIRE often fails to capture both the quantitative and qualitative details of your financial life, within the context of your financial goals. While planning is more pragmatic, it comes at a premium. It’s not a quick fix and perhaps it’s why it’s less attractive than some other approaches like FIRE. Planning is a practice that requires dedication, honesty and patience. Most of all, it helps us maximize our lives, even if we made past mistakes like choosing the wrong career path, taking on too much debt or failing to take control of our financial lives earlier on.