Earlier this week a Twitter user that goes by the alias “Side Hustle King” got ratio’d. If you aren’t familiar with the term, it’s when your tweet generates more comments that likes. It’s usually a good indicator that you said something dumb.
In this case there’s no denying that the tweet was dumb. Here it is:
In Side Hustle King’s defense, he put in the comments that this tweet was a mistake caused by typing too fast. Even so, it’s tough to imagine what he really meant. One used suggested he mean $50k a month. It’s easy to see how the typo would have occurred, but that would have made it a pretty obvious choice for anyone who isn’t very old. Maybe he meant $50,000 a year which is more reasonable, but not is he missing three digits, he wrote month not year.
Whatever his original intention, it’s worth running the numbers to see why the tweet is so horribly wrong. Running the numbers will also help us see what a better comparison would have been. You should always run the numbers.
How Far Does $50 a Month Go?
The first level of analysis we can use is a break even analysis. We’re going to ask the question of how long it would take before you accumulate more than a million dollars through monthly $50 payments.
Here’s the math:
$1,000,000 / $50 = 20,000 months
That’s a lot of months.
20,000 months /12 = (almost) 1,667 years
So there you go. If you can live to the ripe old age of over a millennium and a half, you’ll have gained a million dollars.
But there’s another simple way to run the numbers: How much is $50 a month expected to be worth in your lifetime? This is somewhat subjective because we don’t know how long you will live. To make the $50 a month look as good as possible, let’s say you’ll live for another 100 years.
Here’s the math:
$50/month * 12 months/year = $600/year
$600/year * 100 years = $60,000
How Much is a Million Dollars Worth?
This seems like a silly question. A million dollars is worth…a million dollars, right?
The tweet was making a comparison between a lump some and a recurring payment. This is an interesting way of looking at things, because in many cases it’s not obvious if the lump sum or the payments is worth more.
When you have a million dollars, you have a lot of options. You can spend it immediately, you can save it in the bank, or you can invest all or part of it.
How large of a recurring payment could you generate with a million dollars?
Well, it depends on your rate of return, which will vary from year to year and which you don’t know in advance. But there’s a rule of thumb to help let people know when they can retire called the 4% rule that can help us make a reasonable estimate.
The 4% rule suggests that if you have a sensible asset allocation, you can pull 4% out of your portfolio during the first year of withdrawals, adjust future withdrawals for inflation, and still have minimal chances of running out of money.
So here’s how the math works using the 4% rule:
$1,000,000 * 40% = $40,000/year
$40,000/year / 12 = $3,333/month
You might object that I’ve forgotten taxes. You’d have to pay taxes on the $50 a month payments too, but this is a fair point. If we assume you have to pay 50% taxes on the one million dollars and run the numbers again, your expected monthly withdrawals are $1,666.67. Which is still way higher than $50.
But wait, it gets better
- Remember, you’re withdrawing the earnings, not the principal. You still have a million dollars stashed away
- Even though there’s a broad range of possible outcomes, most of the time your nest egg is expected to grow under the 4% rule.
In other words, it’s entirely possible to look at your balance after 30 years of making $40,000 withdrawals (meaning you’ve withdrawn more than $1.2 million) and see that your portfolio has doubled from one million to two million.
A decision that’s actually difficult
It probably would have been best if Side Hustle King had asked if you’d rather have a million bucks or $50,000 a year forever. The $50,000 is above what the 4% rule suggests, but still very much possible based on the historical rate of return of the stock market.
More risk-averse people would gravitate towards the payments while the daring would take their chances with the lump sum. You could have a healthy disagreement over which is better, and even debate the merits of how much you should spend and how much you should invest based on your goals.
But $50 a month is not close to attractive enough to forgo a million dollars. Let’s put one final nail in that coffin.
A Million Dollars, Risk Free
Let’s say instead of investing the money, you put it in an online savings account earning a measly 0.05% interest.
Here’s the math:
$1,000,000 * 0.05% = $5,000/year
$5,000/year / 12 = $416.67
Which is still way better than $50 a month. Even if you adjust for taxes. And there’s no risk whatsoever. You could open multiple accounts to make sure every penny is FDIC insured.
There are two clear morals to this story:
- Always double-check your tweets before sending them
- Always run the numbers for yourself
If for some reason you don’t feel like running the numbers, here’s a solid piece of advice: When given the choice between a life-changing lump sum and a less-than-life-changing monthly payment, always choose the life-changing option.