Skip to Content

Multiply the $ value of recurring stuff you purchase by 300 and see if you still want it

When you earn an income that is noticeably larger than what you were given or earn previously, you have the tendency to inflate your lifestyle. Such situations are when you get a 10-20% pay raise, when you go from being a student getting an allowance to an actual paying job.

Without a fundamentally sound decision making system, usually we will buy a lot of crap. Think back if you are old enough, what are the things that you subscribed to and you wish you haven’t.

The sensible way of evaluating purchases is based on whether you really need it, and as well as how much you value the thing and service. Often our brain only see Yes or No, Can or Cannot, Get the best or Don’t. Usually most things are a meter ranging from low to highest. You don’t have to get the best. You can get what is 25% below the best and it would still be very good.

Since you have to pay for most of the stuff and services, the best way is to tie it to the dollar value. One way of evaluation is to project how much the item or services will cost you in the 10 years or 20 years to maintain it (read What if you got 10 years of income today?)

Joshua Sheets from Radical Personal Finance puts it in a different way in this recent interview (15.30 min) that he did. In fact, this interview was a wealth planning things that I usually agree with all roll into one 1 hour bomb. So do listen to it if you can while going for a job,  at work, or at commuting.

He said: Multiply the stuff and service you want to purchase by 300.

This will tell you how much of a wealth machine (property, business, stocks and bonds) you require to fund that recurring expense to perpetuity.

A good example is your handphone bill. Suppose your bill is $50 per month, to fund the hand phone bill with your  stocks and bonds portfolio, you need to reach $50 x 300 = $15,000.

You can then evaluate, if I want to stop working fast, do I want something like this expense.

Another question to ask is that can I live with a $30 per month hand phone bill when I don’t have such an intense job any more?

The amount will be cut to $30 x 300 = $9,000. You need $6,000 less!

This is an example of looking at things as a gauge or meter instead of it being a simple yes or no.  Shift until it matches the optimum level.

Why does recurring stuff and services matter? Because it is likely that this is something your family will be habitually addicted to and you think you will need it to perpetuity and that you cannot cut down.

Is this true? I will let you figure that out. My job is to put the possibility out there for you to think about each of your recurring services.

One recurring service is your holiday. It was a good to have. But nowadays the common awkward topic at work will be “So where did you go for holiday this year?”

It becomes a culture that you have to go on a recurring basis.

So a $4800 per year holiday for 2 every year, you will need $4800 x 25 = $120,000 in your stocks and bonds portfolio to fund this level of holiday. Do you value the holiday that much?

So next time, other than projecting 10 years forward, you can multiply by 300, and see if you really want something like that. Be more critical about your expenses if you find freedom important, or when you are drowning in expenses.

The idea behind the number 300

The number is not some magic voodoo. It is a mathematically number that Mr Money Moustache simplified. Suppose you have a wealth building method that makes you 8% per year and you can spend down 4% per year, your money will last for a long duration (25-40 years). These are usually through passive stocks and bonds portfolio or property rental. You may not agree with this but that is a topic for another day.

Suppose you would like to stop working tomorrow and your annual expenses is $36,000, your wealth machine needs to let you get out $36,000 per year. To spend down at 4% rate, you need $36,000/0.04 = $900.000. Instead of $36,000, suppose your annual expense is $1. You will need $1/0.04 = 25.

300 is only 25 x 12 months since the amount is monthly.

To find out more how I de-construct how much in your wealth machine you need to create to be close to financial independence, I shared the generic formula to put your fixed deposit, stocks and bonds, property and business in perspective of how to create a perpetual wealth machine here.

To get started with dividend investing, start by bookmarking my Dividend Stock Tracker which shows the prevailing yields of blue chip dividend stocks, utilities, REITs updated nightly.
Make use of the free Stock Portfolio Tracker to track your dividend stock by transactions to show your total returns.
For my best articles on investing, growing money check out the resources section.

This site uses Akismet to reduce spam. Learn how your comment data is processed.

momo

Tuesday 17th of March 2015

Hi drizzt i will just ask here in this latest post. Hope you dont mind.

In your experience in income investing, how much cash/cash-like investments should one hold? E.g. for rights issue or the so-called war chest. 20%? 40%?

Reason for asking is, if it requires say 40% cash, wouldnt a traditional portfolio of >60% stocks and <40% bonds/cash be likely to beat the income/dividend-focused portfolio?

E.g. 60% reits / 40% cash vs 80% sti etf / 20% cash.

Reason for asking is there is no need to have cash in hand for things like rights issue for sti etf. Thanks.

Kyith

Tuesday 17th of March 2015

hi Momo, so sorry for the late reply. I think this is not an apple to apple comparison. we are not even sure the long term of sti etf and reits differs by how much. suppose they are equal, and the volatility are the same, the allocation in my opinion should be largely similar. but the problem is that volatility may be very different.

with regards to cash, it is something that many retirement experts say it should not be allocated too much (then again they are talking about a de-accumulation phase). the rule of thumb should be to ensure that a stocks and cash allocation volatility is as low as a stock and bonds allocation, and probably give better returns. since cash is much lower returns and not volatile perhaps its closer to a 70-80% stock allocation.

then again, each of us has different perception towards volatility,

i believe sti etf do not need rights issue, and you are refering to REITs. that is hard to plan for as well, because we do not know how the number of rights to issue. i have not thought about this part honestly.

LW

Sunday 15th of March 2015

Really good article that ties in with the idea of ERE (early retirement extreme)!

Kyith

Monday 16th of March 2015

Hi LW, that's true, probably everyone resolve around that community

This site uses Akismet to reduce spam. Learn how your comment data is processed.