This is the third post in a series on American PI:E™ – the recipe for early retirement, true autonomy, and reclaiming your American dream.

Last time we looked at the left side of the financial autonomy equation: PI:E. We talked about different ways to generate passive income and why that’s important to achieving real financial independence.

This time, let’s look at the right side of the formula: Expenses.

“If you aim at nothing, you will hit it every time.” – Zig Ziglar

The right side represents our goal; the amount of money we need to generate via passive income to have full control of our time going forward. There are five factors that go into figuring out what “E” should equal for you. Follow the DREAM model to cost out your future financial plans:

1. Dream costs
What are your mid to long-term dreams? As author Chris Hogan would say – can you see them in “high-definition?”

Do you dream of travel, home-ownership, giving large amounts of money? Sit down with your spouse or team, and write down on paper what you want to do with the money in your life – put a dollar figure next to those items that cost money. Determine if they are one-time costs, or if they will require monthly contributions.

If you dream of leaving a financial legacy to your children or a charity, determine how much money that requires you to set aside each month using savings accounts or investment vehicles. You can utilize the compound interest calculators at Investor.gov to help figure out how much to include in your plan.

In his book “The 4-Hour Workweek,” Tim Ferriss presents an ideal lifestyle worksheet, a perfect tool to help spell out some of these costs.

2. Rising costs
Remember, the cost of goods in America typically rises over time. This is called inflation, and should be factored into your strategy if you’re looking for permanent autonomy. Ask yourself: will my passive income streams be able to generate more and more income each year to keep up with the rising cost of groceries, gas, healthcare, etc…?

In recent years, inflation has averaged 2-4%, so if we say that we will factor in an average 3% rise in cost of goods, we can assume that prices will double in about 24 years. In other words, what $10,000 would buy today would take $20,000 to buy in 24 years at an average of 3% inflation. The bottom line? Every year or two, re-asses your current PI:E ratio to make sure your passive income streams are rising to make up the rising cost of goods. If not, you’ll have to nurture the goose to get some bigger golden eggs – AKA earn more.

3. Extra costs
No projection of expenses would be complete without a buffer. Factor in an additional 20% a month to make sure you’re covered if some unexpected crops up.

4. Annual expenses
Take recurring annual expenses like holiday shopping, insurance premiums, and real estate taxes, and divide them out into your monthly expense calculation. That way you know you’ll have enough when the time comes to pay up.

5. Monthly expenses
This is your basic run-down of all of your monthly expenses: food, housing, transportation, and clothing, plus all other expenses that run in your monthly budget. Any budgeting app worth it’s weight will help you organize these – some of our favorites are www.everydollar.com or the budget templates in Excel.

You can have the greatest impact in this category as your monthly expenses typically reflect your lifestyle choices. Cutting costs here can help you reach financial autonomy sooner if that’s your goal.

Finally, add the monthly total from all five areas together and plug it into the right side of your PI:E formula. Accounting for these five cost areas will help you understand what you need to generate while you actively work to have financial autonomy, but will also give you a goal to hit as you build passive income streams for retirement.

For more resources on passive income generation, ideal lifestyle costing, and inspired retirement, check out tools found at:

Mr. Money Mustache
The Tim Ferriss Blog
Chris Hogan 360
Investor.gov Calculators