2d • General discussion
Money comes from Creativity: Net Worth vs Income
A lot of us (perhaps including myself) is obsessed with Net Worth.
The reason why this obsession comes into play is the old traditional rule of 4% withdrawal rate.
The idea is that - if you just invest in government bonds or S&P 500 without any strategy, without any knowledge, without any management, you can live off 4% forever.
This ultimately results in a very large net worth figure required to retire.
For example (I am rounding all the numbers here)
$10M * 5% = $500K a year = $50K a month
$20M * 5% = $1M a year = $100K a month
One of my friends even said they wanted $100M becasue
$100M * 5% = $5M a year = $500K a month
The more aggressive one is with their net worth goals (and put into treasury bills or GICs), the more you need to toil away to get there.
In other words, we will all be old and fragile if we need to toil away till $100M before we retire.
Work is not life, and life is not work.
Instead (I've said this many times), focus on the income and creative ways to get there.
For example - there are many businesses that require low capital cost (e.g. accounting (haha), software, info products, digital products etc) which one can make money without using a large amount of capital
Many moons ago, I used to sell yoga mat bags (lightweight, easy to ship and cheap to make $2-$4). Yoga mat bags can be sold for $20 on Amazon (as I compete against Lululemon).
That's a return of 5x to 10x
That means - in order to get to $10K a month with yoga mat bags, you don't need $2M*5% = $100K / year = $10K a month
Instead, you would only need $25K to purchase inventory * 5x return = $125K - $25K product and shipping cost = $100K a year = $10K a month
Yoga mat bag is an extreme example where the profitability is very high.
So in the investing world - if you have an advanced strategy where you make 30%. You would need
$300K * 30% = $100K / year = $10K / month
In other words - you don't need $2M, you just need $300K.
This reduces your suffering and toiling away by 1 - $300K / $2M = 85%
This means if you used 40 years to make $2M. You just need 15% of that 6 years to make $300K then use an advanced investing strategy to generate the $100K / year you wanted.
So you save 40 - 6 = 34 years of work.
That's really the power of creativity.
Cheers,
Eric
----
Eric Seto
Chartered Professional Accountant (CPA)
Chartered Investment Manager (CIM)
Founder of 5MinInvesting.com
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Money comes from Creativity: Net Worth vs Income
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