Rule of 3600
“$1 today is worth $15 in 40 years” doesn’t really capture well what investing a dollar today actually means in terms of your goals. Most of us here aren’t trying to buy more stuff, we’re trying to buy time and freedom.
So, what does time cost? The formula is quite simple:
cost_of_one_day = net_worth_dollars / 3600
This means if your net worth is $3,600, investing $1 buys you 1 day of retirement in the future, no matter your target number or age. This way of seeing things captures why it’s so important to invest when your net worth is low (usually applies to young people). When your net worth is $1,000,000, it takes $278 to buy 1 day of retirement in the future. This gives some perspective of what it costs in terms of time to continue working; if someone works 250 days a year and dumps their whole income into investments, they would need to earn $69,500 net to break even, otherwise they’re valuing security or money over their time (that’s okay, just be conscious of it), or because they enjoy their job more than retiring.
days_each_dollar_buys = 3600 / net_worth_dollars
Each year of investing has an expected return of 7% of your net worth. This translates to 0.028% per working day (250 in a year), which is roughly 1/3571 or ~1/3600. So for each $3,600 invested, you’re expected to make ~$1 per day on the stock market. By investing additional money, you’re buying guaranteed returns; at $3,600 invested, you’re buying 1 day of guaranteed returns with each dollar.
Applied to investment psychology
Stock market crashes and corrections
When the stock market crashes or corrects, your net worth drops, and each additional dollar invested buys more time than before the crash/correction. Remember this, and you’ll be psychologically inclined to buy low.
At a certain dollar amount, a person might decide that they value spending those dollars than have an extra day of freedom in their life. I think most people would say that they’d rather have an extra day of freedom than spend $1. Probably the same for $10. Maybe at $100 per day, some people might say no they’d rather have fun with friends, family, or buy/experience something they always wanted than have an extra day. If $100 is that threshold, then your CoastFIRE number is $360,000. If you have absolutely nothing to do with free time, such as just wasting your day browsing Reddit, ask yourself “would I pay $100 at $360,000 net worth to browse Reddit for a whole day?” This should hit hard on some people, because retirement is pretty boring if you don’t develop hobbies to do once you pull the trigger. The more fulfilling your life currently is, the higher your CoastFIRE number should be (e.g. I would pay $500 for an extra day of cycling the Alpes vs. $5 for an extra day of browsing Reddit/sitting around/mindless activity), and vice-versa. Psychologically, this helps people with boring lives spend more/develop hobbies, and people with more exciting lives value investing more. It naturally settles onto a sweet spot.
The higher the expected returns of an investment, the high the risk, and the more costly it is to buy a day of time. This helps adjust risk too as you approach FIRE. If you’re investing in a high flying tech stock that returns 30% a year, then the rule of 3600 becomes the rule of 833. This means that at $200,000 invested, it already costs $240 to buy a day of time with that tech stock; perhaps it’s more worth it to buy VTI/VTSAX for $55 a day at that point, or even earlier? Then let’s say you have $400,000 invested in 50% tech and 50% VTI, your average daily cost of time is $295. If you’re earning less than $295 per day, you’re taking too much risk with that portfolio. Let’s say you earn $240 a day net, so you want to rebalance to get your average daily cost of time to $240; sell $61,325 of tech, and buy VTI with it, now you have $139,675 of tech and $261,325 of VTI. The goal of financial independence is to reach average daily cost of time equal to your daily net income with a portfolio of 100% VTI, and whenever your portfolio has an average daily cost higher than your daily net income, it gives you a sign that you should de-risk. After FIRE, this could mean setting up bond tents, having 1-2 years expenses in cash, investing in hedge funds for the very rich.
PS: this method works for almost any investment. For example, BTC. It returns on average 130-140% a year. That’s a rule of 260. If you’re earning $100 a day net, your max investment in BTC should not exceed $26,000. If you’re “investing” in call options which have an expected 3x return in a month, that’s a rule of 0.0006868118945. If you’re earning $100 a day net, then your max allocation to that call option should be around 7 cents, otherwise you’re taking too much risk (i.e. gambling). In other words, unless you’re earning $145,600 a day after taxes, you should never buy even a single call option contract of that kind (~$100).