No matter how much money you have...
- theangryactuary
- May 26, 2024
- 2 min read
If you had 10 million dollars, how would you spend it? It’s a trick question, you should be thinking about how to generate sustainable income from it. If risk free interest rates are paying you 5%, then that means your 10 million dollars of capital will generate $500,000 a year before tax. If taxes are 40%, then you have $300,000 left to spend. Think of your 10 million of capital like a money tree. Treat the interest and dividends generated by your capital as if they are leaves grown from the tree. If you cut too many branches from the tree and eat into your capital, you won’t grow enough leaves to avoid cutting more branches until only the stump is left.
The Lottery:
Wouldn't it be great to win the lottery? Just think of all that money. The problem is, being rich really is a state of mind. Understanding wealth is about understanding how the rate of money inflow needs to be more than money outflow to stay rich. Even the biggest trees don’t have infinite branches.
If you do a quick google search, you’ll find plenty of examples of past lottery winners who lost it all after winning. You’ll even find stories of how Wesley Snipes and Nicholas Cage didn’t quite understand the concept of taxes and upkeep on property. The former went to jail for tax evasion and the latter made some questionable decisions when it came to movie roles. Don’t be like them.
Grow your own Money Tree:
There are a plethora of books, youtube videos and articles giving you great advice on how to build your own money tree. But the important thing is for you to dedicate your time to looking into that now. Focus on having a growth mindset and developing skills and competencies that will make you more valuable in order to generate income. When you get that income, think of how much you can reasonably save and start to invest and grow that wealth tree. The important thing is to start now if you haven’t already done so. Speak to a financial advisor. Long term planning is the key.
Takeaway:
Having a large sum of money does not make you rich in the long run. It’s all about the rate that you spend the money vs the rate that money comes in. If you pick the leaves of your tree faster than new leaves can grow, you end up having to chop the branches which reduces the number of leaves you can grow. Even if you have $50M, but your spending hits $10M a year, you’ll run out of money in 5 years (assuming you don’t make any investments).
Further reading:
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