$1M Today Or $1000 In Passive Income

You know those people that life to serious, you ask them if you had to save your mom or your dog, who would you save; then they start to ask for more question as it was a real problem. Well, that’s me, I’m a weirdo. So, when I saw this question on twitter, I said I know the answer but let’s break it down

The question is simple, would you rather 1M today cash, or $1000 a month for a lifetime of 84 years, and if you go, it transferred to a person you pick. Now this is fun. Let’s run the numbers.

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1. This question is awesome because it makes you really think and have to break things down

-But it comes down to a few things

-Cashflow and opportunity cost (aka Discount rate )

-Let me explain

With one option:

-You’ll get a full $1M today, and if you chose to you can invest that money and let that money earn let’s say 10% a year

-However, if you chose the option to receive $1000 per month in income for 84 years, you’ll receive 1m and 8k over the life of that deal

-So question is, how much is that $1M and 8k worth ( vs what I could have been making from the 1M at 10% a year starting today )

2. My favorite part ( the math )

-So the formula to understand the present value of money is the sum of all cashflows divided by 1+discount factor raise to amount of years

–So the crazy thing is this, if someone told you, I will give you $1M8k today or give it to you in 84 years, well automatically if you discount that money over those 84 years its like $334 today, meaning it’s a terrible deal

But because this deal 1M or receiving money every year it’s a little more complicated

Time line:

-Year 1 you get $12k which is worth 12k

-But by year 2 you have to consider that 10% you would have made in that year, so that 12k is only worth 10,909.09

-And it just gets worst and worst

So what’s the right answer

-For this problem you take the 1M today obviously and you invest at 10% more on that later

-But if you want to negotiate, you could say how about you give me 100k or 10%, and that way you end up making a profit around year 30 ( so in this case the passive income has to higher than your discount or rate or equal )

-To actually justify it

3. However this gets even more tricky

-Because we can run the numbers in 3 ways now

What if first you just took the 1m and invested it at 10% for 84 years and withdraw the equivalent of 12k adjusted for inflation every year

-Well after 84 years you would have 2.4Billion dollars and would have taking out 4.3M

-Which is 4times more than you did with the original 12k a year

-Plus 2.4billion is a lot more than a million

Second you could have grabbed that 12k every year for 84 years and just invested at 10%

Which would have given you a total amount of 431M

Third if you negotiated to get him to give you 100k a year

Then you would have gotten 3.59B

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*Some of the links and other products that appear on this video are from companies in which Tommy Bryson will earn an affiliate commission or referral bonus. Tommy Bryson is part of an affiliate network and receives compensation for sending traffic to partner sites. The content in this video is accurate as of the posting date. Some of the offers mentioned may no longer be available. I’m an Accountant but I’m not your Accountant, always review information with your Accountant/CPA and your Financial Advisor.

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