What's Your REAL Money System Target?

[Jay Cruz]

Hi, looking for a clarification...

Question: What's the "real" mathematical formula for knowing your Money System Target?

In Chapter 37: Give Your Road A Destination @MJ DeMarco states

To calculate your money system target, multiply your Net Living Cost by 12, then divide by .05, or 5%. Five percent is the minimum expected yield on a money system.
​

So, based on this formula, if my monthly Net Living Cost is $10,000 per month then my Money System Target would be $2,400,000.

Money System Target = ($10,000 x 12)/.05 = $2,400,000

But doesn't this assume you get paid yearly from your Money System?

I'm new to investing, but I know using some apps (like Wealthfront) I can withdraw earnings each month.

So then doesn't this mean my Money System Target is really $200,000 and NOT $2,400,000 (granted I still get 5%+ returns each month)?
​

I'd appreciate any clarifications or insights to the accuracy of my thought process.

Thank you!

 

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[theag]

Good luck getting 5% per month instead of per year.

 

[Jay Cruz]

Good luck getting 5% per month instead of per year.

Could you elaborate on how you came to the conclusion that 5% per month is unreasonable?

 

[Jay Cruz]

Also, would love for someone to just clarify my big question...

IF 5% per month is attainable... then wouldn't your Money System Target be much lower?

 

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[theag]

Could you elaborate on how you came to the conclusion that 5% per month is unreasonable?

Because 5% per month is 60-80% per year, depending on if its compounding or not.

And 5% per year is about 0,4% per month compounding.

Its math.

 

[GuestUser450]

Also, would love for someone to just clarify my big question...IF 5% per month is attainable... then wouldn't your Money System Target be much lower?

It seems you're confusing annually with monthly.

The money system assumes that 5% is attainable ANNUALLY, not MONTHLY.

Your monthly draw would be based on the annual interest (5%) gained from the principle ($200,000) - so approximately $8800 after tax.

5% annually is .004 monthly (4 tenths of a percent) -

5% per month would be close to an 80% yearly return.

How to Never Work Another Day in Your Life, The Money-System Portfolio

 

[Raoul Duke]

https://www.thefastlaneforum.com/co...derstand-fastlane-business-mathematics.41481/

 

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[Tapp001]

$10,000,000 Total Goal. Build million dollar revenue business in area with a multiplier of at least 10 and sell.

Some people may see it as crazy, but that's the goal. Ten Million. I've done the math, and that will give me the life that I want.

 

[king156]

250 million CASH

 

[EvanOkanagan]

If you want MEGA-interest returns with little to no work at all, I'd suggest binary options.

Sit at home, stare at your computer screen and laugh uncontrollably as the money pours in.

 

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[king156]

If you want MEGA-interest returns with little to no work at all, I'd suggest binary options.

Sit at home, stare at your computer screen and laugh uncontrollably as the money pours in.

nice sarcasm lol

 

[IrishSpring600]

Lol, I know everyone already touched on this but I want to elaborate.

$1,000,000 business net worth.

5% return/month = $50,000/month

* 12 months = $600k

So that means your business isn't really worth $1,000,000 unless the multiplier for your industry is 1.66. That just means your industry is so volatile it may not actually be worth investing long-term in it, or the industry is relatively new.

 

[The-J]

As others have stated, you're doing the math wrong.

Take your goal monthly income, multiply it by 12, then divide by .05 (or multiply by 20, same thing).

If you want $10k per month before tax, you need $2.4m in investments that earn you on average 5% returns before tax.

And yes, it assumes you're getting paid yearly, so in this hypothetical example you're getting a check for $120k every year. However you touched on an interesting point.

Different investments compound at different rates but the rate they almost always give you is related to your effective annual yield. It's called a quoted rate. Your effective annual yield assumes compounding of an investment; however your quoted rate does not. So divide your quoted rate by the number of periods per year, in this case it would be 12.

So 5%/12 = .417% or so.

If the investment pays out every quarter, then you divide it by 4.

5% monthly returns are basically impossible unless it's you doing the work.

 

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[GIlman]

As others have stated, you're doing the math wrong.

Take your goal monthly income, multiply it by 12, then divide by .05 (or multiply by 20, same thing).

If you want $10k per month before tax, you need $2.4m in investments that earn you on average 5% returns before tax.

And yes, it assumes you're getting paid yearly, so in this hypothetical example you're getting a check for $120k every year. However you touched on an interesting point.

Different investments compound at different rates but the rate they almost always give you is related to your effective annual yield. It's called a quoted rate. Your effective annual yield assumes compounding of an investment; however your quoted rate does not. So divide your quoted rate by the number of periods per year, in this case it would be 12.

So 5%/12 = .417% or so.

If the investment pays out every quarter, then you divide it by 4.

5% monthly returns are basically impossible unless it's you doing the work.

Compounding would only really come into play if you drew money out once a year, otherwise your compounding period would only be 30 days not 12 months, and if you drew out monthly compounding would have negligable impact.

Why does this matter, because often the annual percentage rate will change if you withdraw the interest more than once a year since the APR is a compounding formula and takes into account the compounding of the interest earned during the year in addition to the interest of the principal at the beginning.

Also, using the term "compounding" if your referring to stocks is misleading. I hear this all the time, but stocks don't compound, the appreciate or depreciate. To truely compound the # of shares must increase. You can achieve this with dividends and then reinvestment. Of course even though the underlying (# of shares increased) the cash value will still be market dependant.

Also there is a net negative effect of a down month. Unless you are in bonds or some other fixed return asset, you will have months where you would have do cash in some of the underlying investment to keep a steady income, which would impact your future return because your underlying (# of shares held) will decrease during some periods.

I would plan on a 10-20% fudge factor to deal with this as well as to give you a future hedge against inflation. You have to have some reinvest able returns to increase the underlying value of your money system to protect against lifestyle degradation from future inflation (I.e. you'll need more money monthly in the future than the present to keep the status quo)