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Today on the show, I'm going to give to you some mental tricks that I think will be useful to you. I'm going to give you some ways of thinking about math, specifically financial math, and specifically the math of the income and the outgo of our lives. And I think these things will help you to manipulate the numbers in your life such that you can better connect the numbers to your specific goals.

Welcome to the Radical Personal Finance Podcast. My name is Joshua Sheets. Thank you so much for being here. Yes, mental math and mental tricks. I promise it's exciting. I promise you're going to like it. And I promise you're going to find it useful. Stick with me today. And I think this will help.

Back in the saddle or back in the office chair, I guess, is a little bit better of a way to say it. In front of the microphone again after last week not recording a single show. That was the first week in the history of Radical Personal Finance since our relaunch almost a year ago in which I've gone a week and haven't recorded a single show.

I apologize for that. Just simply not able to get it all done, wasn't able to get it all done. I simply decided to prioritize the new website which I was working on last week instead of recording new shows. I released a couple of older episodes from other interviews. I hope you enjoyed those.

I think there was some good meat in there and I hope you found those enjoyable. Sorry for the absence. It's kind of interesting. It's just the truth about life. I did the show last week. It was very well received, I guess, the week before last on opportunity cost and how important that is.

And frankly, that's the challenge that each of us face. It is not possible to do everything. It's only possible to do the most important things. And you can't even do all of the important things all the time. And so I constantly find myself growing and learning that I can't get it all done.

It's not possible for any of us to get it all done. So I just simply have to choose what things get done and what things don't. And that doesn't really feel good sometimes. It's kind of a stretching experience, a growing experience. For example, last week I just – I needed to get the website done and for some reasons which I won't go into, which by the way, you can go and check it out at RadicalPersonalFinance.com.

Give me – let's see. This show is being put – going out. It's 9:30 at night here as I record this on Monday, March 30th. So this show will be going out late tonight. Give me at least another day. I've got a few things ready to go. It wasn't quite ready for primetime but I had to launch.

And so then you can go and check out the new website at RadicalPersonalFinance.com. The key – the main functionality of the site – and by the way, I'm going to go ahead and just share a few personal things here. Feel free to skip forward if you don't like the personal stuff.

But the main functionality of the site is what was important to me. I've reached a point in this show's growth that I've got so much content that it's overwhelming for new listeners. And not everybody obviously is going to go back and just listen to all of the episodes. Even though I would love that and I really would, it's just simply not going to be the case.

So I need to organize it a little bit better. But because of the diversity of the show content that I choose to present and also because of the broad and deep spectrum of the content, I really struggled with organizing it. The main feature of the new website, it doesn't only look a little bit prettier although it certainly does a little bit more up to date.

But the key thing is the organization. But not all of the organization is reflected in the website. You can see the menus. You can see how things are going to be organized. But now I've got to go through the mammoth task of individually, properly categorizing, sorting, filtering all of the past content and all of the future content.

But you can at least get an idea of where things are going. The show is not quite ready for prime time but my web developer who was helping me on it, he and his wife are expecting a baby any day. He was the one who was able to launch it.

I'm able to work on it but he's the one who's able to launch it and make the transition for me. I had to get it done even though it wasn't quite as ready as I would like it to be done. That was why I canceled all the shows last week and I had to get it done because when his baby comes, as I hope you do with your families, I just simply – I don't expect you to do a thing.

You need to spend time at home taking care of mama, taking care of baby. That's the stuff that actually matters. So we set the site live this weekend and there's still actually some lorem ipsum text on there with fake text that I need to go still and fix and a bunch of work left to do but you can at least see the outlines of it.

I'm certainly enjoying the journey of an entrepreneur but it's kind of the classic entrepreneur's problem of too many irons in the fire and not enough things that make it go. You're kind of bootstrapping the thing. It's an exciting journey. I'm growing a lot. I'm learning a lot. I am constantly dropping irons.

That's the way life works is you can't keep – I guess a better metaphor would be you can't keep all the plates spinning. You just have to choose which plates you let drop. So as an example, thank you to all of you who have emailed me and written me nice emails.

I would love to respond to each of you and at some point I will but I just simply have to shut off the email inbox and I just put an auto responder that says I'm not doing email right now. I have to be okay with disappointing a few people there of not being able to get back because I have to keep going forward and keep moving forward.

I have to keep the big things happening. Otherwise, I won't reach my goals and that's important. So each of us is responsible for our own goals. So go buy RadicalPersonalFinance.com. Check out the new website. I hope you guys enjoy it. It's going to be a lot more feature-laden. There's some big features also that aren't even launched yet but I still have a lot of work to do to get it ready for the public.

But again, had to get it going. So let's get into the topic of – the primary topic of the show. But I figured I owed that to you after at least after a week of no shows but back into a normal publishing schedule this week. So let's get into the topic.

The topic today is I want to share with you some mental tricks, just some mental manipulation that you can do with numbers that I find to be very helpful and others that I've worked with have found it to be helpful. So I want to give you some ways of thinking that I think will serve you.

For whatever reason, we as humans have a very difficult time with large numbers, especially large numbers that compound. And what happens is it becomes very difficult for us to apply large numbers to our life. Unfortunately, the math of finance and the math of our lives involves very large numbers.

Now, large can be relatively large or it can be actually large. What I mean is – I remember when I was a kid and the first time I had managed to save $300. And I remember how massive – how rich I felt when I saved $300. I had a little – it wasn't a piggy bank.

It was a classic car. It was like an old Model T or Model A, something along those lines. And it had a little key in the bottom and I kept most of my money in there. And I remember I had three $100 bills and I rolled them up really small and I taped them to the roof of my piggy bank and there was coins in there.

And I just felt so rich. But of course today, running a household, I have a wife and kids and $300, it's a big deal. But frankly, it's $300. It's not that much money. Or is it? And that's the problem is that we always struggle with the scale of numbers.

And so what I want to do is manipulate the scale to make things more understandable. That's the major point that I'm going to be driving home today. But I first just want to give you a couple of examples of the trouble that we have with large numbers. I want to first start with the numbers of things like millions and billions and trillions.

Those of you who are connected to things like national finances will quickly know that the US government has almost $20 trillion of debt outstanding and over $200 trillion if you include all of the debts that also include the unfunded liabilities of the large social programs. But the problem with that number, the reason nobody really worries about it is simply because nobody can really conceive of how big it is.

But let me give you a simple illustration to help you think about the difference of numbers. If I ask you how long a second ago was, we have a very clear reference for that. We know that one second was just that long ago. If I ask you how long 100 seconds ago was, you can quickly do the math on that.

100 seconds ago is 1.67 minutes ago. Very, very understandable. Now if I ask you how long 1,000 seconds ago was, then you can do the math on that. It would take you a few seconds, but you'd come up with it. So 1,000 seconds is actually 16.67 minutes ago. That's a very understandable frame of reference.

But what if I say a scenario of 100,000 seconds? How long ago is that? Well, now we get into a problem because, see, 100,000 seconds is actually 1,666 minutes ago. But you don't have any frame of reference for minutes. How many minutes ago is 1,666 minutes? You don't know.

It's hard to put that into a frame of reference because that many minutes we're not used to dealing with. We're used to dealing with minutes in 15-minute increments or 60-minute increments. We're not used to dealing with them in 1,000-minute increments. But the answer is 1,666 minutes ago was 27.78 hours ago.

So immediately, once I convert 100,000 seconds into minutes and then into hours, you can immediately understand how long ago 100,000 seconds was. But we have to make those conversions. Now what if I say there's a million seconds ago? How long ago is a million seconds ago? Well, a million seconds was 16,666 minutes ago, which was 277 hours ago.

But wait, how long ago is 277 hours? Now many of you can do that one, but it's a lot easier if I tell you it was 11 1/2 days ago. Now you understand that a million seconds is 11 1/2 days. I can make it understandable. Now I want you to pay attention to two lessons as I continue this illustration for you.

The two lessons here are, number one, we need to convert numbers into numbers that have meaning to us. That's what I'm doing here with converting seconds to minutes to hours, and then I'm going to go to days and years. But number two, notice how much of a difference there is between very large numbers.

So let me continue on with this scenario. Let's say I said 100 million seconds ago. How long ago is that? 100 million seconds is 1.6 million minutes ago, which is 27,000 hours, which is 1,157 days ago, a graspable concept. But it's easier if I tell you it was 3.17 years ago.

How about a billion seconds? Well, a billion seconds is 16.6 million minutes, 277,000 hours, 11,574 days, but it's a lot easier if I just say it was 31.71 years. You see how important that conversion is? Now I'm going to skip the conversion since I've made that point, but just recognize that I need to put things into context that you can understand and consider the impact of these big numbers, of why we have a difficult time understanding these.

100 million seconds is three years ago. A billion seconds is 31 years ago. 100 billion seconds ago is 3,000 years ago. A trillion seconds is 31,709 years ago. And 100 trillion seconds is 3,170,000 years ago. You see the problem with large numbers? You see the problem why the US government has so much money that it owes and it'll never be paid back?

There is no question of it ever being paid back. The question is just simply when do we default on our debt and how do we default on our debt? That's it. Because when you say, "Oh, it's got 100 trillion seconds ago," that's 3,170,000 years ago. There's a big difference between a trillion, which was 31,000 years ago, and 100 trillion.

So that's the point I'm making as far as these large numbers matter. Now, other examples illustrate the problems that we have with the third thing I want to demonstrate, which is we have a very difficult time understanding compounding, the compounding of money. And the best examples here come with the examples of – well, the two is – one is the grains of rice and the other is paper.

So let's start with grains of rice. Let's say that I give you a chessboard and I put one grain of rice on one square of the chessboard. And I promise you – or better yet, I make you promise me that you're going to double the rice on each chess square.

Can you do that? Well, you can run the math on this. I actually have run the math and it's kind of interesting. But it's impossible to do that because a chessboard has 64 squares on it. And by the time you got to the other side, you've used more rice than exists in the world.

I actually ran the math one time. I came out – I started with one square on square one, and I finished at 64 squares. And if you – the doubling process of this rice happens and it comes out to be a number which goes like this, 9 quintillion, 223 quadrillion, 372 trillion, 36 billion, 854 million, 780,000 grains of rice.

It comes out to be 318,047,311,615,682 pounds of rice or actually 144,265,314,168.41 tons of rice or something like 195 times more rice than was produced in the world in the year 2012, which was the last year that I could find these statistics for rice. The other one that I love is actually the folding paper.

Let's say that I give you a large sheet of magic paper and I tell you to fold it in half. So every time you fold it in half, it doubles. So the question is if you do that 50 times, how thick is the paper? Well, the answer is it's basically the distance from here to the sun.

The calculations would vary depending on what thickness of the paper you use, but it's basically here from here to the sun. That's how long – that's how large it would be if you took a single sheet of paper and doubled it 50 times, folded it in half 50 times.

So it's no wonder why with these examples of how difficult of a time we have considering numbers, it's no wonder why we struggle to understand the math of personal finance and we struggle to apply it to our own life. If you take these three points, point number one is scale.

We need a scale that we can relate to to be able to understand numbers. Point number two is we struggle with big numbers. And point number three is we don't understand compounding intuitively. If you take these three things together, we need to develop some new tools to be able to understand numbers.

And so that's what I'm doing for you today. And that's one of the things that I find most valuable is converting the normal numbers of our daily budgets into other numbers that we can actually understand. And there are a few ways to do this. The first way is from time to time, take some of your monthly or annual numbers, things like – and I'm primarily focused here on expenditures, but you can apply this to income as well.

I do it both ways. But expenditures is intuitive. So take your monthly or your annual numbers and convert them into daily numbers and figure out how much you're actually spending in a day on your actual scenario, on something that's actually understandable to you. The best example for me on this was when I went from – I took my cell phone – a few years ago I took my cell phone plan from AT&T to AirVoice Wireless for my iPhone.

And at that time, my iPhone bill was a little under $100 a month. And I was able to go from a little under $100 a month to $10 a month with AirVoice Wireless. And I accomplished that through changing some of my usage patterns. I just stopped using so much mobile data which allowed me to easily make that switch to AirVoice Wireless.

Now the cool thing about AirVoice Wireless is that on their phones, when you have a phone that is activated on AirVoice Wireless, they put a little script on your phone that every time you send a text message or every time you hang up the phone, it actually puts a little counter and it shows you how much you've paid for that.

So each text message is two cents and each minute of speaking is four cents. So you hang up the phone and if you had a ten-minute conversation, you can see there that you were charged 40 cents. I was concerned about that. I didn't want to know like how much money it was.

But one of the things I did was I sat down and I took my cell phone bill and I converted it to a daily number. And I said, "Well, let's convert this $100 a month bill." And I found out that if you take $100 and you divide it by 30, you wind up with basically knowing that you're spending $3.33 a day on your cell phone bill.

And I recommend that you actually put in your actual numbers and do this for yourself. Now in the United States of America, the average monthly cell phone bill is $48.79 a month for the last year that I could find the data which was 2013. And so that comes out to be $1.66 per day.

Now when I had a counter on my phone there, what I found was I almost never even went through $10 in a month with AirVoice Wireless. And I never restricted my usage of texting and I never restricted my usage of speaking on the phone. But just simply by having that reference, as long as I spend less than $3 a day on average, I'm saving money.

I was able to feel totally free, talk as much as I wanted to, and I found that I almost never spent even a dollar a day, even on a busy day. It really shocked me. Because it was so tangible, I was able to take the big bill and turn it into a daily number and it changed my behavior.

I saved a lot of money because of it. It was a really beneficial experiment. So I challenge you, take one of your monthly expenses and convert it into a daily expense just to see the number. Now again, remember, I'm not telling you what you have to do. The point is not what my financial goals are or what I want to spend my money on.

The point is what your financial goals are and what you want to spend your money on. That'll be different for each and every one of us. But the key is understand what you're actually trying to focus on and then put the numbers into a way that you can think about.

Another example of turning a big bill into a little one that I think about is turning annual numbers into daily numbers. So there are some big annual expenses that I face, things like property taxes or homeowner's insurance. So in 2014, as an example, my 2014 property taxes were $2,953.

So let's call it three grand. $3,000 divided by 365 comes out to be $8.21 per day. So I know that every day I have to pay $8.21 for property taxes. Now interestingly is $8.21 per day is a very tangible number, and I can easily put that into context of an hourly wage.

$8.21, well, for some people, that's 30 minutes of work. That may be an hour of work for somebody at an entry-level wage. That's a lot of money, $8.21 per day. Another one is my annual homeowner's insurance bill. Last year, my homeowner's insurance bill was $3,630. Divide that into 365, and now I have another $9.95 per day cost.

So I'm up to $20 a day of pure cost that I have, and that's not including any kind of – there's no residual value. There's no property value. That's not paying a mortgage, in which case I might have some amortizing value of a property. That's just pure cost, pure expense out of my pocket for lifestyle costs, $20 a day.

From homeowner's insurance and property taxes. Now, many people don't ever see those numbers, and what happens is many people lump those numbers – most of us. I lump mine into a monthly escrow payment that goes with my mortgage principle and interest payment, and most of us do that. We just get used to numbers in that context.

So for example, I get used to the fact my monthly mortgage payment, $1,250 a month. I get used to that number. So then if it's $1,400 a month, ooh, that would be expensive, or if it's $950 a month, that would be little. But I don't think in terms of that $3,000 annual cost.

But by turning it into a daily cost, I can compare my alternatives. So if you think back to my show recently on opportunity costs, I'm not saying this has to be for you, but where my mind often goes is my mind often goes to long-term travel. And I think, "How can I fund long-term travel with my family?" Well, when I figure out that I'm spending $20 per day of property tax and homeowner's insurance costs to live where I live – and I know an example would be – I've enjoyed a blog – I need to get these people on the show.

There's a site called soultravelers3.com, and this is a family of three who's been traveling the world since 2005. And they've been traveling the world on a daily budget of I think it's about $23 a day. And that's what they've been living on for 10 years. So when I know that that family of three can live on $23 a day and they've traveled all over the world, they've lived in Europe, they've lived in China, and they've been doing that for the long term, I think to myself, "Huh.

Well, I could go and travel the world in just a little bit more than my property tax bill and my homeowner's insurance bill." Now, another example that I think of is I think of things like – well, bum puzzles. I had Patrick Schulte on. The great thing about him, which is nice, is he publishes all of his costs online of what he and his wife have spent on their family adventures and comes out to basically depending on how they're traveling, whether they're on their sailboat – and by the way, there's a – I interviewed him on the show if you're interested in listening to that.

But whether that was them traveling on their sailboat or in their motorhome, it comes out – they spend about $3,000 to $4,000 a month. We call it $100 a day. $3,000 a month divided by 30 comes out to be $100 a day. So if I put it into that context, and they travel much more luxuriously than the sole traveler's family does, but if I put it into that context, now all of a sudden, well, $20 a day, that's a fifth of my travel budget if I were a bum puzzle.

Or another travel article that I read or blog I read is a site called songoftheroad.com. This is a couple that has a neat big truck and a big camper, and they've been traveling all throughout South America. Well, I've watched their budgets to see what they're spending and let's see.

In Bolivia, they spent 18 days in Bolivia, spent a total of 1,570 days, and they spent $87 a day. They spent $80 a day in Peru. They spent $111 a day in Ecuador. They spent $82 a day in Colombia, and they're traveling and seeing all the sites and doing everything.

So I put everything in terms of travel for me, but you might not, which incidentally, travelers are wonderful at thinking about things in terms of what they're giving up. When people have a trip goal and they say, "Well, I know my daily budget is going to be $50 a day, so I can either choose to buy this trinket or spend this money or I can travel for another four days," they have that very clear understanding of opportunity cost.

But you figure out what it is for you. And then apply that method of thinking. So that's my first one. Just consider taking the big numbers, the big monthly numbers and the big annual numbers and turning them into daily numbers. And don't miss the fact of the hourly wage.

If you know what your hourly wage is, recognize $20 a day is what I spend in property taxes and homeowner's insurance. So I know now that if I were making $20 an hour, one hour of every day is spent paying for taxes and insurance. Now I can decide, is that worth it to me?

Now, the next way that I would manipulate these numbers is I would take the daily or weekly or monthly numbers and convert them into annual numbers. So in the same way that in the right context it's more convenient for us to think about years instead of minutes, it's also more useful to us to think about years financially instead of days.

Or for some people, maybe weeks or maybe months, but I'll just use years. The concept applies regardless. So let's say I take my cell phone bill as that same example and I turn monthly numbers into annual numbers. $100 a month doesn't really feel like it's $100 a month, whatever.

That's about what I pay for my cell phone bill. But if I convert it, and it also helps if I put a little bit of emotion into the tone of voice and I say, "I'm spending $1,200 a year on my cell phone bill. $1,200 per year on my cell phone?" All of a sudden, I can think about it differently.

Or this is this famous latte factor, right? Let's say I spend $4 a day for a daily latte. And so $4 a day, 20 days per month comes out to be $80 a month. And then multiply that times 12. That's $960. I spent $960 a day on my daily latte?

It changes the tone a little bit. $4 a day doesn't feel like that much because we're used to that transaction. But by changing the transaction size from $4 a day to $960 a year, we can understand it a little bit better. So try that one. Take some regular expense and convert it into an annual expense.

Again, take it. It can go weekly, monthly, or annual. But convert it into an annual expense and see if you're happy with that level of expenditure. Of course, for me, and again, as an illustration only, I think in terms of travel. So I look over here at Song of the Road and I notice, oh, their budget for Mexico.

We spent eight months in Mexico and Central America and spent a total of $15,253. That means we spent on average $66 per day. So then I go and immediately say, "Well, I spent $1,200 on my cell phone bill divided by $66. Wait a second. You mean I could travel for 18 days in Mexico?" And by the way, they're living on a luxurious – they have a big fancy camper living very luxuriously.

I could travel for 18 days in Mexico or I can have a cell phone. And I try to take that number and relate it to something that is meaningful to me. That's the point. Try it out. Take some daily, weekly, or monthly number and convert it into an annual expense.

Now the next one is where we take the time period out just a little bit longer. And here is where you have to start accounting for compound interest. Now there are a few ways that you can do this. I think of this in terms of 10-year periods, 40-year periods, and then even kind of basically the rest of my life period from now through age 90.

Let's start with a 10-year period. Ten years is a very reasonable amount of time to think in terms of – and there's no right. You can do this in five years, 15 years, 20 years. I'm not going to teach you how to do the math, but you pick the period of time that is right for you.

But let's just go with 10 years. If you were to take an expense and you were to calculate it out over a period of time, you can start to understand what the impact can be to your life if you don't make the expense. And so let's start with a one-time expense.

One thing that's useful here is to get a simple multiplication factor. It's very simple with a financial calculator. I'm going to teach you the keystrokes here. But even if you get past the keystrokes and you just need a simple multiplication factor, then you can figure out what to do.

So let's start with we need a rate of return we're going to use. Again, I have no idea what rate of return you should use, but let me just use – we're going to do this in this way. I'm going to use a 10% rate of return, and I'm just going to pull off a 3% inflation adjustment.

So let's use 7% for a rate of return. And this is quick, hard, dirty podcast math to keep things simple. So let's use a 7% annual rate of return compounded monthly. So let's figure out first what the factor would be of $1 if we're going to invest for 10 years.

So let's say we put into our calculator, we say $1, hit 1, change the sign, put that in as our present value, put in 10 times 12 as our number of periods. So 120 is our number of periods. We're going to put 7% interest compounded monthly into the calculator.

We're going to put in our zero for our payments, and we're going to hit the FV, the future value. Well, what you find out is at 7%, if we save $1, 7%, we come up with a factor of 2. So if you're going to earn 7%, you don't spend $1 today, just multiply it by times 2.

That's how much richer you can be 10 years from now. You could also do this using the pretty well-known rule of 72. If you are not familiar with it, the rule of 72 is you take the number of 72, divide it by whatever percentage you're using for your interest rate, and that will tell you how many years it'll take for an amount of money to double.

So if we took 72 and divide it by 7, we'd come up with 10.28. So it comes out to be the same as our other calculation. It's actually – it was 2.0 – 2.something. I just read the 2 off the calculator to make it simple. So we know that if we don't spend $1 today over the 10-year period, we're going to have 2, $2 in 10 years.

So we ask, would you rather have the $1 now or would you rather have the $2 in 10 years? Now, we can also do this from the perspective of something compounded – excuse me, not compounded, of an ongoing expense. So let's run this on the calculator and let's keep 10 and put 10 in times 12, so 120 periods in for our n, for our number.

Put 7, divide it by 12, compounded monthly. It's 0.58% interest monthly. Put in 0 now for our present value and put in $1 a month for our payment and hit the future value number. And we wind up with a number of 174. So any $1 that we spend on a monthly basis is worth $174 in 10 years' time if we can cut an expense.

So this is useful because you can apply this number to your thinking and you can put your expenditures into a 10-year context, which is where the numbers can get a little bit impressive for you. So let's say that you have an opportunity to spend $150 and you can look at that and say, "Would I rather have this $150 item now or would I rather have $300 in 10 years?" Because I'm using that factor of 2, so just multiply it times 2 if you're assuming a 7% interest rate.

If you want to assume a different interest rate, just go back and run a factor so that you can apply in your own thinking. Or let's say that you are having a $150 monthly expense. Take $150, multiply it times – what was it? – 173 and you wind up with $25,950.

So if I can eliminate a $150 expense from my budget, then at the end of 10 years, I could expect under those scenarios to have about $26,000 of extra savings in my investment accounts. So would I rather have the benefit that I'm getting now of whatever I'm spending the $150 on or would I rather have the $26,000 extra money in 10 years?

And your answers will vary. Sometimes it'll be I would rather have the benefit now and other times it'll be I'd rather have the $26,000. Only you can decide that. You can also do this for a longer time period. And so if you stretch this out to 40 years, all of a sudden it can be really impressive.

And you'll hear me do this often on the show where I will often turn numbers into 40-year periods of time. There are a few reasons I do it. Number one, it is a valid way of thinking. I think age 25, age 65, retirement planning, retirement planning, retirement planning, and I use 40 years.

The other reason that I do it though is I want the numbers to sound impressive. And it's hard for a number not to sound impressive after 40 years when you get compounding going because 40 years is a tremendous amount of time for compounding to work. Now, this is accurate, which is why I do it, but it's also a little bit – it's not quite sleight of hand, but it's just a little bit of a technique that you'll hear me often use to try to make these numbers sound really important.

So let's stick with – well, let's first run a factor so that you can figure out how to use these numbers for quick mental math because we don't all run around with a financial calculator in our back pocket. But remember the factors I've given you, $2 for a one-time savings in 10 years and 173 – multiply it times 173 for a monthly savings.

Let's figure this out for the 40-year period. So we'll just put in $1 for my present value. We'll put in 40 years. We'll put in 7% interest compounded monthly, no payments. And we know that the future value of that dollar after 40 years is $16. So now I can use $16.31.

So now I can use 16 as a useful factor if you like that 7% annual real rate of return. I don't want to spend $150 now. Multiply it times 16 and I say I'm going to be $2,400 richer when I retire in 40 years. Or we can also do this again for the monthly expenditure.

Let's take 40 years, put that in still, 7% compounded monthly, put in zero for our present value, put in $1, make it negative for our payment and hit our future value button. And we wind up with $2,640. Well, now we know that we can multiply any monthly expense. If we could eliminate a $1 a month expense from our life today, we'd be $2,640 richer in 40 years.

So let's multiply that. Let's just say we eliminate the $150 a month expense. Multiply that times $2,640, that'd be $396,000 extra dollars in 40 years. That's impressive. That's impressive. That's why I use that 40-year period. So now you can just memorize that number if you want and look at your monthly budget and say, "Would I rather have the benefit of this $150 a month expense or would I rather have an extra $400,000 when I'm at my retirement age?" It's up to you.

The other long-term thing that I do, and I'm not going to run the math on this, but I sometimes will do this out to age 90 or age 100. So I'm almost 30, so I'll do a 60-year number or even a 70-year number. Statistically speaking, depending on my own personal health and how good of a steward I am of my own personal health, but if my family genetics are any indication, I should live into my at least mid-90s.

Both of my grandfathers died in their mid-90s. My one grandmother died at 96 and the other grandmother is alive and she's older than 100. So I've got pretty good genes. You assume medical technology is increasing and such that we're experiencing longer expected lifespans. As long as I take care of my own personal health situation and no tragedy strikes of unintended early death, I think I probably lived at 90 or 100.

So sometimes I'll use that number and I'll run an expenditure. Now, I personally, I think in terms of multiple – my goals, I think primarily in terms of multiple generations of the impact that my children will have on the world 300 years from now. That's what most of my life goals are that I'm thinking about.

So what is the impact that my children are going to have and what is the impact that they're going to have on their children and those children are going to be on their children? And what massive change can we affect in the world over the next coming five to ten generations?

The primary component of that is not financial, but there might be a financial component. And so it's kind of fun to sit down and say, "What can I do now that's going to benefit my progeny at the age of 90, at my age 90? And how can I do intelligent planning toward that day?" If that's useful for you, use it.

If not, toss it out. But the last way of thinking that I'd like to leave for you is that calculation for financial independence that I've mentioned to you many times. And it's just simply for you to take your expenditures and figure out how much you need to have saved in order to support those expenditures without your needing to work.

And so the best rule of thumb here is the simple 4% rule, the idea that if we have a portfolio of money, we can take 4% off of that portfolio into essentially perpetuity and live off of it. So if I have a million dollars invested, I can spend $40,000 a year essentially into perpetuity.

I'm keeping it simple for this scenario. If that's true, then that gives me a useful number to think of. That means for every monthly expense that I have in my life, I need 300 times that monthly expense saved to meet that monthly expense forever. The math, just so that you know, well, let's just use the million dollars.

Million dollars, let's just do it the simple way. 4% of a million dollars is $40,000. What's $40,000 times 300 equals – excuse me. $40,000 is my annual number. It's $40,000 divided by 12. It comes out to be $3,333. Multiply that times 300 and what do you get up? You get a million dollars.

So you can figure it out that way. The factor has already been figured out. But for every monthly expense, just take any monthly expense and multiply it times 300 and that's how much you need to support that expense. So I recently joined a new gym. That gym cost me $20 a month.

I multiply 20 times 300. I know that I need $6,000 of investment capital in my portfolio in order for me to maintain that gym membership into perpetuity. If it's an annual expense, then multiply it times 25. So if I'm spending – if instead I'm spending $200 per year, 200 times 25, I know that I need $5,000 invested to maintain that expense forever.

Now this is useful because I can think back to how do I buy the benefit of something without necessarily paying the cost. So if I need $6,000 invested in a portfolio to meet my gym membership obligations, then one simple thing I could do is just spend less than $6,000 to meet those gym membership obligations without having to actually pay the monthly membership model.

So maybe I need to spend $100 on some special course to learn how to do bodyweight exercises only. Well, compare $100 to $6,000. That might be a wise thing for me to do. Or maybe I need to buy some equipment, and that equipment is going to cost me $2,000.

Well, if I go ahead and invest $2,000 in that equipment, I can short-circuit that financial planning problem. I can say I can eliminate that $20 a month expense from my budget because I've spent $2,000 on this exercise equipment that I need. Of course, I need a place for it and all of that, but you take the thinking and apply it.

I'm just trying to give a simple example that you can understand or that you can uptake and apply with your own unique circumstances to it. But that's the financial independence calculation, and it's extremely useful. It will help you to smoke out for yourself what you actually think about the different circumstances of your life.

Now, I mentioned earlier that you can do this with income as well, and I've primarily focused on expenditures. But as I close the show, I just want to mention that you can indeed do this with income. So I'll give you just my personal examples. I'm running the Patreon campaign, and that's – and by the way, thank you, guys.

So right now as I record this, we're up to 108 patrons on the Patreon page and up to $1,167.50 per month, which is awesome. Thank you, guys. Our first initial goal that we're working toward is $2,000 per month. When we hit $2,000 a month, I'm going to commission a new intro for the show, and we'll upgrade that.

The ultimate goal is by June 1, we need to be – I would love to be, if possible, if you guys will continue to support me, that $6,000 of support of monthly contributions on the Patreon page so that I can keep the show ad-free. I really want to keep the show ad-free for you guys, but I need – I can't do it unless we can hit that $6,000 a month goal.

So we've got two months by June 1 to do this and get from $1,167 per month up to $6,000 a month. If every member of the audience kicked in two bucks a month, we'd be there today. So just consider. Every time – so I get an email when new patrons join the Patreon page, and that email will say, "John Smith just pledged $3 a month." Well, I automatically, in my mind, convert monthly numbers into annual numbers because I think in terms of annual revenue.

Most businesses and most business owners think in terms of their annual budget. So I automatically take $3, and I automatically convert that to 36 bucks. Now, is that true? Is that right? Is it not? No, it doesn't. I mean, it's not right or wrong, but I do that because it helps me to understand how big of an impact that is.

Just think of me as a business owner. If I have somebody that's getting value from my show and they're paying me $3 a month, it might not sound like much in terms of $3 a month, but at $36 a year, many people need to work hours of their time to do that.

And I have someone that believes in me to give me $36 a year. And the lifetime value of that customer of mine, that person who has voluntarily, when they didn't have to, who has voluntarily stepped up and said, "I'll go ahead and make this $3 a month contribution. I'll go ahead and make this $25 a month contribution." The lifetime value to me as a business owner is massive.

And so to keep myself aware of that, I automatically convert numbers into annual numbers. But I also go the other way because the reality is this show for me is my lifestyle business. I'm very aware of that. I walked away from the big fancy expensive business to build a lifestyle business, allowing me to do something that I love to do from anywhere in the world.

And so to keep myself focused and not to be discouraged during the day of small beginnings, I focus on the daily numbers. So I take that $1,167 per month that's currently pledged on my Patreon page. I divide it by 30 and I say I've got $38.90 per month – excuse me, $38.90 per day of income set up.

And you know what? The reality is I could live on that. I need to pull out my expenses, the business, the hosting fees and the website fees and all of that stuff. But the point is I've got $40. That's almost a livable wage for me as far as a daily benefit.

So now I know that in the work I've put in, I could walk away from – I could sell my house. And if I wanted to pursue the lifestyle of the soul travelers and travel around the world with my family, I could do that. That's really encouraging when you're in the initial stages of a business and it's slow and nothing is working and you're working and it doesn't feel like anything is getting traction.

It's encouraging to take things and put it into those daily numbers. Those are tangible numbers. I could even take it down to the hourly numbers. And I don't think in terms of hourly wages but a lot of people do. And so I could automatically say, "Well, that's $38.90 per day." If I were going to work an eight-hour day on the show, then I'm up to $4.86 per hour.

I've created for myself a $4.86 per hour job, which I think is pretty awesome. Now, the goal is to get it to $486 per hour. That's the long-term goal. But it's still pretty cool to know that I've created something. It's much more encouraging to me to look at it on that small scale than to look at a monthly number.

So that's how I apply that rule even just toward the income scenario. And you might find it useful as well. These are just tricks that you can use to apply to help yourself come to terms with the meaning, the reality behind the numbers. I hope these concepts are useful to you.

They have been to me and I believe that they will be to you. Because finance is 100% personal but it's frustrating sometimes to hear me-- if you're accustomed to hearing me say that you don't understand what I mean, this is what I mean. It's to make your numbers personal to you and to make them applicable to your situation.

And this is just one way of doing that. Finance is not overwhelming. It's not a mountain. No matter how big the number is or how small the number is, it can be converted into a more understandable iteration of itself. And that can be super valuable. So try this both ways and just start applying it to little things in your life.

Ask yourself when you're about to spend $5 on something or $10 on something, "Would I rather make this $5 expenditure or would I rather have an extra $10 in 10 years?" Or, "Would I rather..." You get the point. I don't have to repeat the whole show. If you start doing this over time, it becomes habit enough and you can always put things into context and into a scale that makes sense to you.

And then by having those things in a scale that makes sense to you, you will be able to actually always know, "Yes, I'd rather go ahead and spend the $5." Or, "You know what? No, I don't value the $5." That's up to you. So that's it for the bulk of today's show.

Thank you guys so much for your support. I just want to say it's an honor to serve you. I really love doing it. And thank you for all of you who are emailing me. I'm sorry that I haven't responded to your emails. I can't do it all and I just simply have to make the decision to email.

For me and for most of you, email is not as important as we think it should be. So I read them as they come in and at some point in the next month or so, I'll be able to respond to them all. But we all have to prioritize. If you sign up today, if you are not a Patreon member, I'm going to send out – we're going to do the monthly Google Q&A for the $10 and up members this next week.

Also, doing the Mastermind is also this next week. That's already scheduled with you guys. But for the monthly Q&A, if you guys get in at the $10 a month level, you can get in. And before this next Q&A, that should be coming out in the next couple of days.

Thank you. RadicalPersonalFinance.com/patron. Cheers, y'all. Thank you for listening to today's show. If you'd like to contact me personally, my email address is joshua@radicalpersonalfinance.com. You can also connect with the show on Twitter @radicalpf and at facebook.com/radicalpersonalfinance. This show is intended to provide entertainment, education, and financial enlightenment. But your situation is unique, and I cannot deliver any actionable advice without knowing anything about you.

Please, develop a team of professional advisors who you find to be caring, competent, and trustworthy, and consult them because they are the ones who can understand your specific needs, your specific goals, and provide specific answers to your questions. I've done my absolute best to be clear and accurate in today's show, but I'm one person and I make mistakes.

If you spot a mistake in something I've said, please help me by coming to the show page and commenting, so we can all learn together. Until tomorrow, thanks for being here. Are you ready to make your next pro basketball, football, hockey, concert, or live event unforgettable? Let Sweet Hop take your game to the next level.

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