Read Millionaire Fastlane
- May 31, 2013
Q1: Why divide gross living cost by 60%? In other words what taxes is he talking about and where did 60% come from?
Q2: Why divide net living cost by 5%? How was 5% determined as the minimum yield of the money system?
Q3: Why multiply the gross living cost by 5? Why not multiply the net living cost?
1. Your taxes are likely 40% or less (on your income). So after taxes, you have 60% of your income left. That is where the .60 comes from.
You start off with your gross living cost (the cash) that you need after taxes. You divide by .60 (60%) to get the the net living cost (the income) that you would need before taxes. That is how much cash you need to make so that you still have enough for your gross living cost after taxes. Division (of .60 on your gross living cost) serves to reverse the multiplication (of .40 on your net living cost).
2. 5% is your minimum expected interest rate on your money system per year. Interest rates depend on the economy and where you put your money.
Your money system gives you interest. You need enough interest to cover your yearly net living cost. Your yearly net living cost is the amount of interest you want from your money system. So when you divide by .05, you are getting your money system target. If you had your money system target, you could multiply it by .05 to arrive at your yearly net living cost (the interest).
Division (of .05 on your yearly net living cost) serves to reverse the multiplication (of .05 on your money system target). Division and multiplication are opposites.
3. You multiply gross living cost by 5 so that you can split your business system target between your lifestyle (20%), your money system (40%), and taxes (40%). The ratio is 1:2:2. You multiply by 5 so that you can divide your business system target nicely.
Regarding the second part of your question, net living cost includes taxes. Gross living cost does not. You multiply the gross (instead of the net) because your business system target is the income that will be taxed (not your net living cost).
It really is a beautiful thing.
Math is satisfying when it all works and makes sense.
If anyone sees I made a mistake, feel free to make the correction.