One of my favorite books, when I was a programmer, was Software Estimation: Demystifying the Black Art. I know, I know – a book about estimating the time it takes to build something? Not exactly the most useful for helping to learn how to invest. Early in my career as a developer, I didn’t realize the widespread use of good estimation skills has:
- You can set deadlines and meet them effortlessly.
- You can create a realistic plan for a team that doesn’t stress everyone out.
- You can make it to places on time and not annoy your friends.
- You can create an estimate of how much you spend in a given year.
- You can calculate out an estimate of how much you’ll need to be financially independent with your desired lifestyle and working environment.
- You can correctly estimate how many jellybeans are in any jar!
Ok, so the last one isn’t realistic, but the rest are!
A great estimator can effortlessly come off as a rockstar at work since they consistently and reliably get their work done when they say it’ll be done. What’s great is we can use those same techniques to create an estimate for how much you’ll need for your desired lifestyle.
What Everyone Gets Wrong About Estimates
There is a mistake that I see people at all stages of their careers make when creating estimates. The mistake? Giving a single-point estimate rather than a range.
Let’s say I asked you how long it takes you to run a mile. If you gave a single point estimate it might be 8 minutes (which is a very good run time btw – nice job). With a range estimate you might say 7:30 to 8:30. With a single point estimate you have to be right down the second for your estimate to be deemed correct. With a range, the actual number can fall in an infinite number of spaces between.
Many of us are used to giving estimates at our jobs. Optimists and people early in their careers might give a 7:30 estimate – saying the “soonest” a job can be done. More experienced people still often give an 8:00 estimate, splitting the difference and giving the best guess.
The real superstars of communication explain that it’ll most likely take between 7:30 and 8:30 – with a guess of about 8:00, but let’s plan for 8:30. If it gets done early, all the better!
For our financial independence estimation, we can think about it the same way – as a range.
At the low end we have the situation where everything goes perfectly. Our expenses don’t rise as much, we don’t have major health problems, maybe we even take on a part time job or some side work that brings in additional income.
On the high end we plan for the worst. Major illness, caring for loved ones and family, a rise in spending, inflation increasing, taxes going up, divorce, unchecked healthcare costs – you get the idea. It’s a lot less fun to figure out this number than the lower one. Luckily it’s very unlikely that everything here will go wrong. You may also find some relief knowing that if you had $X amount saved you’d be OK – even if everything you can think of goes wrong.
What Else Everyone Gets Wrong About Estimates
Thinking in ranges is a great first step. If you’re thinking in ranges you’re already ahead of 90% to 100% of people (see what I did there?).
The next most common mistake is to decrease your range to make you seem more confident. A range is only as useful as your upper and lower bounds are. It’s OK if your range on an estimate is huge! That just means there are lots of unknowns. As time goes on and you get more data that range will get smaller and smaller.
Using our running example – let’s say I asked you to estimate how long it’ll take you to run a marathon (26.2 miles)?
If you usually run a mile somewhere between 7:30 and 8:30, one way to estimate that might be to multiply both of these by 26.2. That gives a range between 3 hours 16 minutes and 3 hours 43 minutes.
Would you feel comfortable giving that as a range? Surely not. Running a marathon is completely different than a 1-mile run. The lower estimate might stay the same (although very unlikely), but the higher estimate needs to go up – way up.
If you had to make this estimate today based on only these numbers what would the high end be? 4 hours? 6 hours? 10 hours? I’d feel pretty confident saying 3-6 hours myself.
There’s only one way to further narrow the range: get more data! If you decide to run a quarter marathon and it takes you 1 hour, then a half marathon takes you 2:15, you can start to narrow in your estimate from both sides. A 3:16 starts to look unrealistic, and a 6 hour looks like a breeze. Maybe you can lower your guess to 4-5 hours – cutting your range a ton!
When making estimates for areas you’re not confident in, it’s hard not to feel dumb giving a wide range. From my experience I prefer looking dumb when giving aan estimate rather than looking dumb by missing a deadline.
Let’s Play a Game
The movie Saw really killed that line, didn’t it? Anyways, It’s time to try a little estimation activity completely removed from personal finance. Try giving estimates (as wide ranges!) for each of these three questions:
- What is the temperature of the sun?
- How many human beings have ever lived?
- How many gallons of water are in Lake Superior?
Choose a wide range for each of these. Wide enough that you’re relatively sure the answer is within that range.
It’s not easy is it? Giving a range wide enough to include everything you don’t know takes a lot of guts. When I give an estimate with such a wide range I feel butterflies in my stomach – like I’m doing something wrong.
You’re probably dying to know if you were right. Click on the button below to show all of the results.
- What is the temperature of the sun?
- 9,941°F / 5,505°C / 5,778 K
- How many human beings have ever lived?
- About 107 billion people
- How many gallons of water are in Lake Superior?
- 3,000,000,000,000,000–or 3 quadrillion– gallons. 3 x 10^15 gallons.
- Side note: Lake Superior contains 10% of the world’s freshwater!
Side note: There’s a great Radiolab podcast episode that investigates the “how many people have ever lived” question: Body Count. Radiolab is one of my favorite podcasts, and this one is worth a listen!
How did you do? Did you make your ranges wide enough to get the correct answer? Did you narrow your range and miss it?
The last question is especially difficult. The first time I estimated that one I had no concept of the upper bound and just said 10^100 gallons. There are only about 3×10^20 gallons in the entire ocean, which put my estimate off by more than the size of the sun.
Making estimates that are this wide may make you feel a little stupid once you learn the result. I know I did once I calculated out my error.
Instead, try to reframe that as embracing what you don’t know! Each estimate is a learning opportunity.
Making Your Own Estimate for Financial Independence
In lesson one of this course, one of the most important numbers was your future spending per year. It’s time to revisit that one – this time thinking about it as a range.
To calculate this out, I’ve created a spreadsheet you can use as a starting point. There are no bells and whistles on this other than the “Estimate” cell which takes into account all data and computed an estimate using a PERT model (Program Evaluation and Review Technique).

Open up this spreadsheet on your own and add any number of rows for potential expenses you might have in the future. The more expenses the better! It helps give a realistic look into your own expenses. Here are a few areas to cover
- Base yearly expenses
- This includes food, utilities, and basic comforts. Any large expenses in this area can be broken out into their own lines.
- Transportation
- Replacing your vehicle, budgeting some amount for when it breaks down.
- Costs for parking and fuel.
- Taxi’s, Lyfts, and Ubers.
- Housing
- Either for your next home or apartment.
- Maintenance costs & taxes
- Insurance
- New furnishing and decorations
- Moving costs
- Yard maintenance
- Family
- Healthcare costs
- Supporting parents
- Raising kids, college
- Dental costs
- Hobbies
- Whatever you want to spend lavishly on!
- Travel, hobbies, electronics, clothes, pets, etc
The areas you’ll want to cover for sure include the big 4: family, food, transportation and housing. Try to create a range for each – giving a low and a high estimate.
Doing this gives a very wide range for my financial independence number – somewhere between $1 million and $5.6 million. Luckily the estimate is much more narrow – between $2.2 million and about $3 million.
Too many people start reading about financial independence and only calculate out their low-end estimate. $1 million is much more achievable than $5, but it’s not going to get you to where you want to go. Be realistic, even if it doesn’t agree with what you want.