If Your Outgo Exceeds Your Income…

…Then your upkeep will be your downfall.

The first step in attaining that work-free income we discussed last time is to free up some money to invest.  It’s a simple formula:  Income – Expenses = Seed Money.  You must have some seed to plant if you want to grow your fortune.

Historical results in the stock market are that over a long term, stocks will yield about 10% growth in capital.  Note that this is a long term average.  In the short term, you might lose capital.  You need at least ten years to make that average.  So, taking that as a start, how much do you need to invest for how long to get to that sum we identified last time?  If we assume that we will continue to earn 10% when we want to retire (a recipe for disaster, as stocks always go up and down.) we can even do with a little less accumulation.  At 10% per year, you would need only $1.2 million to get $10,000 each month.  How long would that take to accumulate?

Monthly Deposit Years
100 46.34
200 39.48
400 32.72
800 26.14
1000 24.08

So, if you are currently 20 years old, you could accumulate that much in time to retire at 66 by putting aside a mere $100 each month.  If you are 40, you could still do it with a mere $1000 a month and have your fortune at 64.  But you must have the seed money.

Of course, if your investments don’t do as well as the 10% we projected, you would need more time or more money to invest.  If you net only 5% after inflation, you would need $2.4 million to earn $10,000 each month.  Here’s how the time stacks up for that:

Monthly Deposit Years
1000 48.06
2000 35.91
4000 25.11
8000 16.25
10000 13.89

At 20 years old, you would need to set aside $1,000 each month until you were 68 to reach the goal.  At 30, you would need to set aside $2,000 each month until 65.  At 40, you would need to set aside $4,000 each month until 65.

What if there were another way, using the leverage of which we spoke, to get that monthly income without such a huge cash outlay?

Next time.

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