What if you got 10 years of income today?

On an average, most of us salaried employees are paid monthly. We make decisions on a monthly basis. Some folks don’t even make sound decisions, they usually let their heart and circumstances dictate them.

So what if you can get 10 years of income today and you won’t be paid for the next 10 years.  How would some of your money decisions change?

Projecting your income 10 years forward

We usually look at our income from a monthly perspective and I am aware that there it extends to some folks looking at it at it from an annual perspective.  My best friend tells me that as a rule of thumb your income usually stays stagnant or goes up. You won’t go for another job unless it pays you better than what you are currently earning at the current place (except for intangible perks).

Conservatively assume that your $3000 salary doesn’t increase for 10 years, it comes to a sum of $420,000.

What if you got 10 years of income today? OnzuslX

Do click to view a larger image.

When you see a sum of $42,000 it may not hit you that you can do a lot with it. When you extrapolate it to 10 years, that sum is large enough that, you start thinking: “I should be responsible cause that is a sum of money that I don’t want to mess around with

If we can get this sum of money today, I bet a lot of responsible folks would freak out because they have always been planning with a monthly amount in mind, just chuck as much as they can to savings and spend the rest.

Can you do it if you are given $420,000 today and not going to get much in the next 10 years?

The spendthrifts will be ecstatic to have such a large sum of money upfront.  They probably running through their heads which holiday destination to go to or what desirable assets to acquire.

Heck, I think a lot will just buy a condo and eat frugally for the rest of their 10 years and hope in 10 years time they can sell the condo at 100% appreciation.

Projecting forward for Building Wealth

I have much friends who doesn’t see the benefit of saving up a sum of less than $500 monthly.  Even at the end of 1 year its only at most $6000. What can you do with that amount these days. 

We all have a threshold sum where, past that, you realize its motivating enough to channel  your hard earn money to build up. This could be $1 million, or $500k or $250k.  The problem is that if you tell them that you will reach that goal in 40 years, its too far for them to feel it.

I find that an acceptable time period is to project forward and visualize how much you will build up in 10 years.

What if you got 10 years of income today? 3syWEFD

Taking $850 per month out of your disposable income and putting it away to build wealth (read my wealthy formula), in 10 years time you would have put away 24% of your income to build up $102,000.  A six figure sum should be more motivating to work towards..

Expand the table and you can see the 20 years projection and 30 years projection.

This is not an extreme saving ratio. You still have 76% for your daily and housing needs.

What if you got 10 years of income today? hQNfXSK

Projecting and visualizing forward creates the motivation factor to work towards, while monthly fixed automated savings create small successes that makes you stick to the plan.

Paying off mortgage in 10 years

Many still lament that a typical flat that cost $350,000 is rather expensive. My assessment is that its not cheap (which is what everyone wants, the free lunch) but its affordable.

There are a few measures of affordability and one metric is how many times of your annual household income. In our case study here, if the wife earns as much as the husband, their annual income would be $82,000..

I have to remind friends a few times that if they are thinking of taking 25 years to pay off the mortgage, their outlay is $450,000. Get that into their head. Its not a $350,000 home.

The price to income in this case is 5.5 times. Being more than 5 times, I have to take that statement back. It looks like factoring interest, we can’t really use the term affordable here.

Can we save some interest by paying off early? Yes we can but many will find it daunting. This is usually because everyone only use their CPF to pay for their home. They wouldn’t want to touch the cash.

What if you got 10 years of income today? DB5rQaS

My friends kept thinking if they can pay off a $350,000 home on a $3,000 salary. Not sure why do they prefer to think they have to pay off the flat by themselves (and not use the spouses income!) . I guess this is how the brain works.

If they project their combine income for 10 years they would realize that they can use 53% of their $840,000 combined income to pay off their $450,000 mortgage + interest.

What about other expenses? That is for them to work it out. We are not saying you have to pay it off in 10 years, but this invites an opportunity for friends to see that this possibility to pay off is real and within their means.

Projecting common spending and optimizations forward

The same kind of framing can be carried out to get a better vantage of whether is it worthwhile to make certain life decisions you make.

Purchasing a car and spending within this specific item might not look as money draining, but when you tally them up and projecting forward, a $159,000 is not a small sum.

What if you got 10 years of income today? V8DekzV

Certain spending optimization decisions made can have a substantial impact to your long term financial well being as well. Would you take care of your health, or choose to live well since you only lived once.

Would spending $2,000 less yearly on vacation help you satisfy some other goals that you value more?

What if you got 10 years of income today? N0FK0gV

Making these hard choices might seem insignificant on a monthly basis, but if you add them up in 10 years, huge advantage you will have.

Summary

Going back to the question, if you were provided with 10 years worth of income today, would you do things differently? Does it change the way you view some of your decisions if we earn a 10 years income upfront?

We handicapped ourselves when we cannot frame things in the right manner. One of the things we don’t frame well is when it comes to money. We frame our spending and saving strategy based on how society drills us. And we were drilled to plan in a short term manager because we get our salary on a monthly basis.

We failed to see some of the possibilities that exist in front of us because we stop critically think.

You are likely to earn conservatively 10 years of your current salary. Think critically whether you are putting them to use in a fundamentally sound manner.

Folks interested to use this spreadsheet to catalog some of these optimization and visualize how big or a small of an impact can assess my spreadsheet here.What you earn is not insignificant and from some of the examples here, you can make a small decision that have a huge financial impact.

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Tony Robbins writes a Money Book centred on the All Weather Portfolio

I got to know that inspirational coach Tony Robbins just released his first book in 20 years and its on money and investing. Usually it will raised a red flag within me when I see folks that started off being an expert in one field delving into investing.

His central idea, seem to build on the all weather portfolio talked about by Ray Dalio. For those not so familiar with Ray Dalio, he runs the largest hedge fund in the world Bridgewater Associates.

The appeal of the all weather portfolio is a portfolio made up of asset classes that are lowly correlated that earns close to a respectable return yet at the same time have a significantly low volatility.

Why is low volatility important? For the average investor, a high volatility or a –50% fall in their portfolio is likely to force them to make irrationally bad decisions.

And here are the relevant statistics for the 30 year period from 1984-2013 courtesy of Robbins:

  • 9.7% annual returns
  • You would have made money 86% of the time (so only four down years)
  • Average loss of just 1.9%
  • Worst loss was -3.9%
  • Volatility was 7.6%

Tony Robbins wrote a post at Yahoo here. Ben Carlson of Wealth of Common Sense tries to do some back testing here. This is not the first time Ray Dalio was mentioned. You can view 2 past articles here and here. He got a lot of bigwigs to review his book, including John Bogle.

Update: Barry Ritholtz did a commentary on this. Apparently he focus on Robbin’s past record talking about money. It is rather interesting:

In a special video on his website from Aug. 6, 2010, titled, “An Important Note of Caution,” Robbins essentially told his viewers to get out of stocks. After lots of caveats, he said:

Right now is a time you might want to take some stocks off the table in the stock market. Especially if they are in manufacturing or retail or banking or god forbid homebuilding and housing . . . I would feel bad if I didn’t warn you . . . One of the biggest bubbles in history is blowing up now.

This turned out to be terrible advice.

The day that video was released, the Standard & Poor’s 500 Index closed at 1,121.64. Yesterday’s close was 2,051.80. Following Robbins’ advice would have caused an investor to miss a 90 percent gain, a near doubling of value. Some of the industries he recommended avoiding did even better.

Some of his other statements were odd or simply false: Perhaps the strangest statement of the video was “Most investors over a 10-year period — 95 percent — lose money.” (There are plenty of other odd and inaccurate things in the 21-minute video).