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The SAO formula will help you identify your income replacement point, or as we like to call it: your freedom point.
It is the point where your passive income replaces your active income.
The Break Even Point
At the end of the SAO formula you’ll notice it mentions the break even point. We’ve gotten a lot of questions asking, “what is the break even point?”
The break even calculation was created by George Antone: an expert financial strategist, a best-selling author, the founder of fynanc, and a great mentor.
I highly recommend checking out George Antone and his amazing philosophy on alternative investing, private lending and entrepreneurship.
The break even point is the point at which your returns maintain your current financial situation with consideration to inflation and taxes. Keyword: maintain.
Your break even point is not the point where you surpass your current situation or “get ahead”, but where you are treading water and stable.
Here’s the formula:
B = i / (1 – t)
i (inflation) = 6% (based on shadowstats.com)
t (taxation) = 40%
Where We Got Our Numbers
Up until 1990, the federal government calculated inflation rate based on a set formula. The formula has since been changed, as CPI-based entitlement programs (such as social security), were increasing the inflation rate higher than the government wanted.
The revised formula is the one we know today. Several items have been removed. To learn more about items not included in the calculation, you can refer to shadowstats.com.
The 40% taxation amount is based on the following: most of us are paying this rate as a combination of federal and state payroll taxes, among other types of taxes as well.
Why and How to Break Even
With this equation, the break even point comes to 10%. That means your returns need to amount to 10% of your investment in order to maintain your current financial situation and be stable.
This includes returns on ALL on your investments.
Traditional financial advisors tell clients to be “well-diversified” and have various investments, but what does that really mean?
It means investments making well under 10% (CDs or bonds), require other riskier investments with higher returns to reach that 10% overall average.
With this more traditional investing strategy, your risk on certain investments is significantly increased.
We want our investors to be a part of safe investments with lower risk that meet or beat the break even point, so you’re not losing ground to inflation and taxes.
Normal Investors vs. How the Wealthy Do It
The typical investor loses ground to inflation, interest, taxes and opportunity cost on nearly every investment.
The wealthy know how to invest with inflation on their side and receive interest, rather than pay it. While they can’t eliminate taxes entirely, they know how to reduce taxes and take advantage of opportunities that increase returns. (See table below)
4 Factors Working for Those Who Know
|FORCE||PAYING SIDE||RECEIVING SIDE|
|Federal Reserve System, the wealthy|
|Interest||Most people||Federal Reserve System, Financial Institutions, the wealthy|
|Taxes||Most people||Federal Government|
|Opportunity Cost||Most people||Federal Reserve System, Financial Institutions, the wealthy|
Do you have some questions about how to invest around inflation and breaking even? Give us a call!