What if you didn't have to work or go into debt to pay for the stuff you want to buy?
Sounds pretty cool, right? Believe it or not, that's something that's possible, but there's a catch. You have to have enough saved or invested to be able to pull it off. What's more, you need to set your spending at a level that doesn't shrink your savings or investment account below a level where it won't deliver enough interest or dividends to continue supporting your buying habits.
So, what level should you set your savings or investment account at?
It turns out there's something out there called the "Multiply by 25 Rule" (HT: frugaldad) that makes it super easy to figure out how much money you have to have saved or invested in an interest-bearing or dividend-paying account. Here's how it works:
- Figure out how much it would cost (per year) to buy what you want.
- Multiply that figure by 25.
The result of that multiplication is a pretty good estimate of the amount that you need to have saved or invested to pay for what you want without working, going into debt, or drawing your savings or investment down too low to be able to keep paying for what you want to buy.
Without going into a whole lot of detail, there are some key assumptions behind that math. First, it assumes that you are earning a annual rate of return on your savings of 4%. If your rate of return is lower than that, you're falling behind, and if your rate of return is higher than that, you're coming out ahead.
Second, that simple math ignores taxes. Yes, you'll have to pay taxes on any interest or dividend income that you may receive. (But if you're smart, you'll have extra saved or invested to pay for all the taxes you have to pay because of this factor!)
Third, it ignores inflation. If the prices of the things you want to buy are going down, that may not be a problem. If they're rising, well, that's a different story....
Now, if you know us, you know exactly where this is going! We've built a tool you can use to quickly estimate how much passive income you need to support one, some or all of your buying habits without working or taking on debt! And of course, we've gone the extra mile - we've made it possible for you to factor taxes and inflation, at least through one year. Just enter your figures for each into our tool below:
Our default numbers are taken from the frugal dad's Netflix expenses, the inflation rate is the U.S.' long term average of 3.3% per year and the tax rate is 28%. As always, if you don't like these assumptions, just substitute your own!
Finally, if you're willing to go to the extreme of working out what it would cost to pay for your entire desired existence, you might just find that magic number you need to have stashed away in your savings and investment accounts to never have to work again!...
Labels: personal finance, tool
Welcome to the blogosphere's toolchest! Here, unlike other blogs dedicated to analyzing current events, we create easy-to-use, simple tools to do the math related to them so you can get in on the action too! If you would like to learn more about these tools, or if you would like to contribute ideas to develop for this blog, please e-mail us at:
ironman at politicalcalculations
Thanks in advance!
Closing values for previous trading day.
This site is primarily powered by:
CSS Validation
RSS Site Feed
JavaScript
The tools on this site are built using JavaScript. If you would like to learn more, one of the best free resources on the web is available at W3Schools.com.
Other Cool Resources
Blog Roll
