Across the internet these days, there is a nonstop stream of confusing investment advice. What stocks to buy? Will interest rates go up or down? Are we due for a market correction? What’s the right investment yield I should plan for? And on and on and on. But really, if you’re going to get serious about early retirement or pretirement, there’s just one number to remember: the number twenty.
Good ol’ TWO ZERO will serve as your task master and trusty guide, leading you safely to the glory land of pretirement.
Now many of us, including your humble host, have known about the number 20 for some time without truly UNDERSTANDING its almighty power.
Here’s how it works. You’re going to use the number 20 to determine what something REALLY costs. That will, in turn, tell you not to buy it. Or, if it’s something you really need, it may tell you HOW to buy it. How? Simply by multiplying the cost by 20.
First, some basic math. My rule of thumb is an investment in today’s market can be done with reasonable risk to drive a 5% yield. Some say 4%, some say as high as 7%. I like 5% because it’s a pretty safe number and it makes for easy math. (If you’re new to investing, just think of investing $100. If you do, you should make a yield of $5 per year. In other words, it’s just another way of saying 1/20th of 100 — you know, 5% see?) So if you want to make $50 per month in the stock market, you need to have $12,000 invested. (50 x 12 x 20)
So let’s take an example. How about your cable TV bill? Let’s say the cable TV temptation is $60/month. First convert that to an annual number, multiple by 12 so $60 x 12 months = $720. That’s what you’re paying every year to watch TV. Now let’s use the magical number 20 to find out what the cable TV REALLY costs. $720 multiplied by 20 is $14,400. You need nearly $15,000 invested to justify your TV habit. Wow, is your love for “Storage Wars” really that great? Netflix streaming at $8/month ($96/year) is a much better deal at only $1,920 invested in the market to pay for it.
Bigger items can be even scarier. Say you want a $30,000 car. You don’t need a new car every year, so one way to look at this is to think about how long you’ll have this car. Say you’ll own the car for five years and then sell it for $10,000. So your cost over five years is $20,000 (actually much higher with insurance, etc, but we’re keeping it simple for this example). Over five years, that’s only $4,000/year. Not too bad, right? Well, bring in Mr. 20.
Twenty times your $4,000 yearly cost brings you to $80,000 yearly. You would need to have $80,000 invested to afford that vehicle for each year of those five years. And, to boot, that money wouldn’t be available for anything else.
So use the number 20 to your advantage. Multiple all recurring monthly expenses by 12 then by 20. For one-time or infrequent expenses, simply multiple by 20 to gauge its overall cost, or compute the yearly cost and do the same math. Even if you can’t purchase something on a yearly or monthly basis, understanding what the purchase is costing your future is worth examining.
And that examination is much easier with the number 20 on your side.