The 4% Rule
I asked whether you lot knew your net worth the other day.
And those were the results.
I’m intrigued by the answers and I wrote a newsletter which will come out this week about the real-life advice I’d give to people who aren’t bothered. Are you signed up?
But it’s also made me realise that I haven’t dicussed the mind-blowingly exciting but simple concept of the 4% rule. It’s not a new concept, it’s not a hidden concept but if you’re not looking at personal finance stuff, as I know most of you aren’t, then it’s just something that is existing and being enjoyed by other people and not you.
The 4% rule is the idea that:
There is a sum of money out of which you can take 4% every single year and the total value won’t go down.
What that means practically is that you can work out the amount which means that you could have an income of your choosing without having to work. It’s also known as financial independence.
You work that number out by taking your desired income, multiplying it by 25 and getting that amount invested in the stock market.
So if you want a £20,000 income you need £500,000 invested. If you want £40,000 income you need £1,000,000 invested.
There are some caveats:
The money must be invested in certain ways - the biggie is that you want it invested in mostly stocks and shares and diversified but with a little exposure to bonds.
Getting £1,000,000 invested is no mean feat - but you don’t have to do it all at once, you can invest over time and reap the rewards of compounding interest.
It’s only worked out for a 30 year term - so if you want an income for 40 years the figures change a little. But also it doesn’t just fall off a cliff, so if you work it out for 30 years and then live for 35 you just might have a smaller amount to pass on (and you also might not…).
And much more nuance, which we’ll talk about in time. But, isn’t that simple?! And to me, therefore, exciting!
It also doesn’t mean that you have to stop working but you could if you wanted. Or you could leave your job and volunteer at a cat shelter, or travel around Greece, or work at a little cafe in Gamla Stan. Hang on, those might just be my dreams…
Can you see how knowing your net worth would be a step on that journey?
Make sure you’re signed up to the mailing list for some more straight forward, practical money stuff.
Love Eleanor. xxx
