Did you know there’s a magic number in the finance world and that number is 300. Keeping in mind the impossibility for anyone to accurately forecast what’s going to be on their bills 30 years from now, which means this magic number is more a rule-of-thumb, it’s still extremely handy in helping to figure out just how much you will probably need in order to retire or at best find financial freedom.
What is the “Rule of 300”?
Again, this is a rule of thumb, it’s safe to assume the figure you come up with at the end won’t be an exact one but instead a rough estimate. We’ll cover some of the caveates later on so you can figure out your own adjustments in order to bring the final figure closer to what you’ll need.
It works like this. Take your monthly expenditure and multiply that by 300, the resulting number is what you’ll need to have saved up in order to keep your quality of life locked where it is right now. Again, this is only an estimate but it’s a powerful one which will bring you very close to real-world figures in sustaining your current lifestyle.
Assume you’re working with a $2,000 per month expense for whatever…
The math is simple: 2,000 x 300 = 600,000
According to the rule of 300 you’re going to need just over half a million bucks to maintain that expense for practically the rest of your life. To be clear about this, the calculation is what you will need in a savings account with or without dividends and no other source of income rolling in, it’s your nestegg, the lump-sum you will have to already be in possession of and require no additional cash flow.
This example figure of $2k used above is a general number, what you need to find out is how much money you spend each month… now how much money you make, now how much money you will spend 10 years down the line but how much you spend right now, today, in monthly expenses, your cost of living. Take that number, it helps to round it up to the nearest whole number then multiply it by 300 to get the lump sum of money you will need to keep paying for what you are right now until the foreseeable future.
Below is a quick example-chart just to give you some rough estimates of what you could be looking at for a handful of monthly figures. You may be taking a look at them and think to yourself “holy cow, there’s no way!” or you might be nodding your head in satisfaction thinking this will be easy. No matter the case, here they are!
Itemizing Your Expenses via 300
Now let’s assume you just want to figure out how much a particular expense will cost you for now until the future… the rule of 300 still applies. Take whatever that expense is and simply multiply it by 300 just as before, grab that number and toss it somewhere in a safe place and there you go!
Taking a look at the chart above it’s easy to spot things that might be well worth their expenditure while getting a better grasp on things which simply aren’t. It all comes down to personal wants and needs in the end after all.
Breaking 300 Down Into The Sum of its Parts
The rule of 300 was created in order to make following a 4% safe withdrawal rate (SWR) much easier to figure out, it works like this… (we’re speaking to the investors in the room now)
Going back to the simple figure of just $2,000 per month in overall expenses, we need to multiply that by 12 to cover each month of the year.
Then, you take the (SWR) of 4% and solve for whatever number will bring us to (2,000 x 12). It’s going to look something like this:
$2,000 x 12 = $24,000
4% of (n) = $24,000
Which breaks down further into this equations…
(n) = $24,000 / (4/100)
(n) = $600,000
Get all that?
I know it’s a bit daunting looking at equations if you’re not used to it but that’s what the handy rule of 300 is for! To make all that mathematical stuff up there super-simple for the rest of us folks.
Making Alterations For A Better Fit
The rule of 300 can be adjusted to better suit any future financial needs and unexpected whatever. It’s safe to say that we’ll never be able to fully predict what will happen in the world of finance a decade or multiple decades down the line, that’s why it’s necessary to always consider working in a buffer wherever possible or have a backup plan you can put into effect wherever necessary.
There are alternate versions of the 300 rule, for instance if you want to go with a withdrawal rate of 5% per year on your investments then the number will shift to 240 and alternatively if you want to use a 3% safe withdrawal rate then 400 is going to be your multiplier!
These are again only estimates based on the math of very smart people in finance, people who know way more than most of us probably ever will… but they are not set in stone. They take a number of factors into consideration, all of which could vary from one person to the next such as how long you will live, how much money will actually be required in the future, how your investments will do from this point forward and etc.