A friend of mine used to say, “In life, it’s the ones you don’t see coming that shake up things the most.” That includes sudden changes in personal income, changes that I have seen happen at even the highest corporate levels. At those levels, it can take six months, a year, or even longer to transition. So, to my friend’s point, now imagine a scenario you didn’t see coming.

Consider a year in your life without any personal income. Based on my experience with high net worth clients, you are not alone if you’d rather not imagine it. And the purpose here is not to frighten anyone but to take a first step in answering the question posed above. We’ll begin that process by asking another question.

How much money do you spend every day?

It is just this simple: The amount of money you spend every day finances what people call their standard of living. Your daily expenses also count as one of your three lifestyle buckets, as we call them. The other two lifestyle buckets are taxable money and nontaxable money; with daily expenses they comprise your financial wallet. Let’s take a look at taxable and nontaxable money first, then we’ll describe a daily expenses plan designed to protect your standard of living.

The two types of taxable money are ordinary income, which is the paycheck you receive from either your employer or your own business, and capital gains, which derive from earnings on investments. Each type is taxed differently, of course, but it is important to calculate how much each contributes to maintaining your standard of living. Then figure the best proportion of each to realize the most attractive tax situation. 

Nontaxable money is the engine you have built—401(k)s, Roth IRAs, bonds, trusts—to maintain your standard of living when you stop earning ordinary income. It does not necessarily mean you are completely tax free, but you and your advisor have designed the “engine” to minimize taxes.

So, how do the types of money figure into daily expenses? Begin with the fact that many people, when asked what their daily expenses are, might answer, “Oh, I don’t know, probably…” and toss out a figure. But to really protect your standard of living, those expenses need to be calculated, not necessarily to the penny, but pretty close. So you begin the process by writing down everything you spend daily—credit card purchases, car expenses, entertaining. By the way, the amount you spend may surprise you.

After keeping a record of daily expenses for three to six months, we can take those figures and come up with a two-year blended average, which can then be projected as a 10-year benchmark. The final result will be the average you spend every year. That is, how much money you will need to maintain your standard of living if your ordinary and/or capital gains incomes decrease(s).

Now comes the hard part. Think of your daily expenses bucket as a real bucket. You need to place in that bucket one year’s worth of your spending, and that money needs to come from taxable income while you are earning it. This bucket now becomes your rainy day fund, and the good news is, you now know exactly how much needs to be in it. 

Think of it this way: If unfortunately, life doesn’t go as planned, you have a financial umbrella rainy day fund to protect all of the savings you worked so hard to achieve for your future retirement.

Read More from Nick Kavallieratos at Morgan Stanley