I’ve come up with something I call the 2X Principle. Before I get into it, let’s go over the Rule of 72 because the 2X Principle is a similar concept.
The Rule of 72
The Rule of 72 is an easy way to figure out how long it will take for an investment to double in size over time. It’s fairly straight forward. You divide the number 72 into the annual interest rate, and that result is a rough estimate of how many years it will take to double.
So if you have an interest rate of 8%, you would divide 72 by 8, and you get 9. Therefore, it will take 9 years in order for that investment to double. A 12% interest rate will result in 6 years for an investment to double, and an 18% interest rate will take 4 years. I think you get the picture.
The 2X Principle
I know I know, predicting the market is silly. It’s a fool’s game. I outlined the Rule of 72 to introduce a new concept that has been bouncing around in my head called the 2X Principle. This Principle relies on two assumptions:
1. That the stock market on average returns about 8% annually, and
2. It usually takes 9 (almost 10) years for the market to double.
When you use the 2x Principle, you multiply a monetary amount by 2 to determine future valuation in 10 year increments.
This 2X Principle compares spending today versus money available to spend in the future. So for every $100 that we spend today, in 10 years from now, this amount would result in $200 (2 x $100). This figure would simply double for every ten years. In 20 years, this amount would result in $400, and in 30 years, this amount would result in $800.
My Workday Lunch
I started to think about this concept when I was eating out the other day and wondering if I really get my money’s worth when I’m out buying lunch. I know for a lot of the frugal people that the answer is normally a resounding no. In an effort of saving money on food, it’s a no brainer to bring in lunch.
On the other hand, I hate eating lunch at my desk. I love the ability to get out of the office, go for a quick drive to clear my head and recharge for the rest of the day. As an introvert, I know that if I don’t recharge for the second half of the day that I will be too drained to make the right decisions for my team.
I also use that lunch hour to handle personal calls, emails and even check up on the blog during the day. I feel too weird conducting these types of things at work and would never want my employer to think that I was neglecting my duties, so I tend to stay off the internet unless it’s truly work-related.
However, obviously going out to clear my head and catch up on other things in my life comes with a real cost associated with it. The other day I was getting a burrito from Chipotle, full disclosure I am a shareholder, so I try to go at least once a week. The lines are starting to pick up, so hopefully my investment will turn around. Quick side note, if you ever hear me talking about buying a falling stock, please stop me. Chipotle was a falling knife, and I have definitely have not done well.
With all that said, I was standing in line and the 2X Principle came to me. Would I still enjoy this $8 burrito if I could have 16 extra dollars ten years from now? What about $32 in 20 years or even $64 in the more distant future. At that point, I was super hungry and was anxiously waiting to devour my delicious chorizo burrito. By the way, if you haven’t had the chorizo at Chipotle, it has quickly become my favorite meat option there.
So it got me thinking about how much I spend on restaurants each month. It’s normally about $100 a month. Added up over 12 months, that’s roughly $1,200. Or over 10 years $12,000. Using the 2X principle, in 10 years, it would actually be roughly $24,000 that could have been allocated towards my FIRE account.
Frugality vs. Value Spending
I started to think about the difference between being frugal versus valuing the things that I spend money on. For instance, I could be a miser and never spend a dollar and save almost everything that we make minus the bare essentials. But here’s the thing, we currently save over 70% of our take home pay. If you include contributions into our 401ks, we are saving over 75%.
I’m sure if we were super diligent, we could save closer to 80%. I’m sure others could even squeeze out more. Honestly, we’ll never get much past 80% because my wife values good nutrition and eating healthy, and also, we tithe, which is very important to us.
If you look at our Personal Capital account, our top 3 expenses are tithing, food and travel. These are all very important to us and are definitely in line with what we value as a family.
With all that said, there are definitely times that I look at our discretionary spending and think wow, was that really worth 2x in 10 years? A lot of times, I’ll say yes, but there are definitely times that I question it.
Does cause me to reevaluate some things? Absolutely. Instead of paying $100 for a specific pair of Nikes I had been eyeing, I found a similar pair of Nikes on sale for $28 that were a 1/2 size too big but fit perfectly with a thicker sock.
I definitely struggle with a balance between valuing money today versus valuing money tomorrow (or in 10 years). It’s something that I work on everyday, and the 2X Principle is something I think about more and more each day.
Have you ever considered the 2X Principle before? Or are you more focused on the here and now? Share your thoughts below.