Wednesday, November 18, 2015

The Perpetual Money Generator

Perpetual Money Generator Machine
The perpetual money generator in action
What if I told you that there exists a machine that could generate never-ending wealth? Even as you grow older, this machine would continue spitting out more and more money. You could go on vacations, buy groceries, shop for new outfits, yet you’d still have enough money that you would never need to devote a moment worrying about these purchases. Most importantly, you would never need to worry about running out of money again. Talk about some peace of mind!

Even though this machine sounds too good to be true, it does actually exist. Anyone can “buy” the machine and take advantage of it.

Most retirements calculators assume that as you grow old, you’ll slowly but surely start to deplete your retirement savings. What if instead, you never depleted your retirement savings but they continue to grow, and grow, and grow? You would create generational wealth. Well then, where do I get it and how can I use it?

With enough money invested, you too can have a perpetual money generator. Once you have enough money invested, your money will grow at a faster clip than your expenses, generating perpetual money and wealth.

Let’s make a few assumptions and run through an example. When you invest in stocks, you typically earn about 10% per year if you’re in an S&P 500 index fund. Inflation, or the gradual increase in the cost of the stuff you buy, goes up by a little over 3% per year.

For the perpetual money generator to work, your investments need to grow at a faster rate than the rate of inflation. Once your investments achieve this point, you can sit back and relax because the perpetual money generator is in motion.

Imagine you have $1 million invested and your expenses total $40K per year. In the first year, you’ll earn $100K from your investments (remember, you’re earning 10% per year). Your living costs total $40K per year and the cost of inflation is about $32.5K, leaving you with $1.027 million at the end of the first year. You’re about $27K better off than the previous year. Here’s the bad news. Your net worth grew by only 2.78%, which is less than the rate of inflation at 3%.

This means that over time, your living costs and inflation continue to chip away at your net worth because inflation is greater, ultimately leaving you with nothing. With $1 million, you’ll be able to live about 66 years before you run out of funds. For most people, this would be good enough, but we’re interested in never worrying about money again.

Now imagine you have $2 million invested and your expenses continue to total $40K per year. You’re a frugal one! Now your investments grow by $200K at the end of the first year. With your living costs and inflation, you’re left with almost $2.1 million at the end of the year, or close to a 5% growth rate. This exceeds the 3% inflation rate. At this point, you’re the proud owner of a perpetual money generator.

The rate of growth continues to increase year after year without slowing down. After 66 years, you’re not even close to losing money. In fact, you’re now at $71 million dollars, your net worth is growing by 6% per year, which is double the rate of inflation growth. Even as you continue to spend money, your money will continue to grow.

The key to the perpetual money generator is that you need to keep your costs in check. If you have consistent costs (and you don’t greatly expand your spending habits as you become richer), the perpetual money generator can be yours.

Using the table below, you can see the approximate amount needed to own a perpetual money generator. As a caveat, you’ll likely want more than the total below to give you a margin of safety and to limit your risk.

Annual Living Costs
Money needed to own a perpetual money generator
$1.00 million
$1.30 million
$1.60 million
$1.90 million
$2.20 million

As you can see, the higher your living expenses, the more money you need to have a perpetual money generator. For every $10K increase in your annual living expenses, you'll need an additional $300K invested. Here’s to the perpetual money generator and to creating generational wealth!