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# Simple Financial Math Numbers For Your Budget

## Using Simple Math To Make Sense of Your Finances

#### The Math

Multiply your monthly cell phone bills (i.e. \$60/mo) by a factor of \$836 and you get \$50,160.
Multiply your car lease payment (i.e. \$545/mo) by \$836 and you get \$455,620.
Multiply your mortgage (i.e. \$3,300/mo) by \$836 and you get \$2,758,800.

#### The x836 Factor

Allow me to explain. We all have our own way of thinking about numbers. When it comes to finances some think in terms of monthly expenses, some in terms of daily expenses and some in terms of annual expenses. Coffee expense, for example, might be thought of as a daily expense. To make to it past the simple consumer mentality and be a master of your finances you have to start looking at these numbers in different ways. Now, the purpose is not for you to give up your expenses… the point is that you want to be able to compare apples to apples so you can make the best decision. If you spend \$60/mo on your cell phone bill and you decided to get your work to give you a company phone then you could potentially have \$50,160 in 30 years. To some that’s not much, to some that’s a fantastic dollar amount. Now, let’s say you are paying \$545/mo for your car’s lease payments and you decided to get rid of that car and buy a \$7,000 used car in cash. Assuming that you would perpetually lease a new car when you lease is up for the next 30 years then you are missing out on \$455,620 in 30 years, that’s the power of compounding interest. Basically, take whatever monthly expense you have and multiply it by a factor of \$836 and that’s how much you could have in investments after 30 years. The assumption is that you invest that money every month for that time period at a 5% rate of return. This dollar amount will take into account inflation and taxes so it’s fairly conservative… you may save much more if you can invest more aggressively.

#### Calculate It Backwards

Let’s calculate it backwards now.
If you have \$18,000 invested in a broad market index fund then you can cover an expense of \$60/mo.
If you have \$120,000 invested in the same fund you can cover \$400/mo of expenses.
If you have \$460,000 invested then you can cover \$1,533/mo.
If you have \$1,350,000 invested you can cover \$4,500/mo of expenses.

The numbers above are take-home and after-tax numbers. So, if you have \$1.3 mill. invested then you actually will have \$4,500/mo of passive income that you don’t have to lift a finger for. Now, what would you have to save a month to get to \$1.3 million in 30 years? \$1,300,000/\$836=\$1,555/mo. If you start today and invest \$1,555/mo then in 30 years you can cover \$4,500/mo of expenses. To do it in 20 years you need to save \$3,166. To do the same in 10 years you need to save \$8,333 per month for the next 10 years. If you are willing to invest more aggressively (7% rate of return) you may get away with investing only \$7,500 per month.

#### How It Relates To Your Own Budget

Let’s look some more realistic budget changes. If you want to have your own private cell phone then perhaps you will go with a company like Ting and save \$40 per month. You may decide to stop leasing all together and just pay the car off by the end of the year saving yourself \$545 per month. This comes with the added benefit of saving  \$50 per month on auto insurance since you no longer need to list the lease holder. You realize that your mortgage is too high and that you would rather rent or perhaps downsize your home and pay only \$2,000 per month for your housing expenses. In total you freed up \$1,935 which if you invested monthly would be potentially worth \$1,617,660 in 30 years… this would be worth \$5,392 or monthly passive income.

#### Financial Worth vs. Personal Value

The purpose of this article is not to have you look at \$20/mo vs. \$60/mo. It’s meant to allow you a way to really compare expenses with easy to understand dollar amounts. Some expenses have more inherent value than the numeric value they add to our future net worth. My occasional coffee at Coffee Time is worth far more than the \$33,440 that I could have extra in my portfolio by forgoing that expense.

Do you see anything in your expenses that you could cut out in order to achieve your financial goals sooner?
What method do you use to determine if something is worth spending money on?

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