Last Friday we walked through The Smartest Money’s 9 Steps of Investing—how to identify great investments and assemble them into the best possible portfolio:
For step 7, I was wondering why you wouldn’t calculate the required capital by dividing the quarterly income target by the quarterly yield, rather than the annual yield.
If someone needs $120,000 per year and has access to an 8% fixed-income product, the quarterly target is $30,000. Since 8% APY breaks down to 2% per quarter, you would divide $30,000 by 2%, which gives you $1.5MM required capital.
But if you divide the $30,000 by the full 8% APY, the result is only $375,000 in investable proceeds, which obviously would be inadequate if the goal is generating $30,000 in quarterly income.
I might be overthinking this, but I want to make sure I’m reading the math the way you intended.
Hi Ben,
For step 7, I was wondering why you wouldn’t calculate the required capital by dividing the quarterly income target by the quarterly yield, rather than the annual yield.
If someone needs $120,000 per year and has access to an 8% fixed-income product, the quarterly target is $30,000. Since 8% APY breaks down to 2% per quarter, you would divide $30,000 by 2%, which gives you $1.5MM required capital.
But if you divide the $30,000 by the full 8% APY, the result is only $375,000 in investable proceeds, which obviously would be inadequate if the goal is generating $30,000 in quarterly income.
I might be overthinking this, but I want to make sure I’m reading the math the way you intended.