In order to calculate the average portfolio needed to cover your needs, you must ask yourself few questions:
What is your main goal of investing and in how many years you estimate to achieve it?
My first goal is to have enough equity to cover my basic needs off by dividends, then keeping reinvesting until the satisfying portfolio level. I estimate to achieve the first goal within 5 years.
What is your basic living cost?
To calculate the portfolio’s amount required to accomplish your goal, we have to go through the basic costs straight away. You can count all your necessities like:
- Monthly rent
- Utilities (gas, electricity, running water, waste disposal)
- Transportation (car insurance, benzin, public transport tickets)
- Private health/life insurance
- Basic goods (groceries, household chemicals)
- Credit installments (short-term and long-term debts)
- Telecommunication (phone, internet)
- Other – anything you pay for that was not mentioned above.
Once you add up these, you have an average current basic living cost. I do not really rely on this amount. I am the type of person who prefers to underestimate something and be pleasantly surprised than to approach the topic too optimistically. To the basic living cost, I like to add 30%. You can add any other value you feel comfortable with. This is my basic living cost just to „survive”. In this variant there is not too much fun, restaurants, cinemas, traveling, clothes, watches and gadgets. This is the bare minimum. The advantage of this is that it can be achived relatively quickly as we do not need tons of money.
Do you want to live to survive or have a satisfying life?
If your goal is just to survive, that is okay. Everyone is different. But if you want something more, dream a little. Imagine how much you need to earn per month to lead the life you want. You may not limit yourself. Where and how many times a year do you want to travel? What cars should you drive? Do you want to cook yourself or do you like catering? Quote your satisfying life.
Remember, however – the more luxuries you include, the larger portfolio you will need to ensure this level of life. Even out of curiosity, you can calculate it and once you know the approximate amount, it may turn out to be even lower than we thought before.
In my case (even after reaching out the appropriate level, I do not intend to give up additional sources of income) it looks currently like that:
- catering, 5 meals a day, 1,500 PLN monthly
- household chemicals, frits, nuts, drinks – 600 PLN per month
- rent and bills (assuming an apartment in the same place) – 400 PLN per month
- 3 trips a year for about 10 days each – 24,000 PLN annually
- gym and dietary supplements – 200 PLN monthly
- clothes and footwear – 600 PLN monthly
- transportation – 1,000 PLN per month
- restaurants and other entertainment – 1,000 PLN per month
This gives us approximately 7,300 PLN monthly. You know what type of person I am, so I like to add at least 20% here (considering currency fluctuations, inflation, hard times, unexpected expenses). It is very possible I will need less than that and I will earn more in the meantime, but it is better to overestimate our expenses and underestimate our potential earnings.
It gives us a total of 8,800.00 PLN. This is the amount we need to earn on a monthly basis.
How much do we need to invest to cover the costs of basic life and the satisfying one?
Here you must brutally assume what average income you can achieve. I think it is very safe to set up 2-4% net per year by dividends. I assumed quite pessimistic – 3% net annually, ignoring any potential increases in share price. Dividend growth may outperform inflation over time, but this is only an additional safeguard (companies often increase the amount of funds paid to shareholders over time).
How does it look like? To stay at the minimum level, I need about 2,000 PLN, which is about 24,000 PLN per year. At interest rate of 3% net: