Calculating Your Pajama Money Rate
Denise Lones
Helping real estate agents build business with branding and coaching. President of The Lones Group
If you are a money tracker, you probably know within a few dollars how much money is in your retirement and savings accounts right now as well as the value of your real estate equity.
If you don't, you can easily look these values up and record these in our Future Value Calculator (in fact, you are going to want that tool throughout this article, so go ahead and download that if you are a Club Zebra Member. If you aren't, why not? We are talking about your finances ALL MONTH this month at on my Denise Lives. Join now for free!)
STEP ONE: Calculate Your Property Equity
Insert any real estate you own under Property Assets. Include the current market value and insert the approximate annual rate of return percentage. Not sure? I put in 5% as my default.
Then insert your current mortgage balance (if any) as well as the number of monthly payments left and the interest rate you are paying.
If you only have one property, your top two sections should look something like this:
You will be able to see your Property Net Value (Equity) projected currently, in 5 years, 10 years, etc. You are well on your way to determining your Pajama Money Rate with these values!
STEP TWO: Calculate Your Cash Assets
Start by first relabeling the categories in Column B to match the different accounts you have. Then insert the current values in Column C as well as any monthly contributions that are made to that account. For example, if you or your partner puts money in a retirement account every month, indicate that in Column D. Then add the approximate rate of return in Column E.
Filled out, this section will look something like this:
We aren't done yet!
STEP THREE: Calculate Your Pajama Money Rate
Your Pajama Money is a term that I use when talking about the principle of compounding interest. In other words, I imagine while I am sleeping that I send my little dollar bills out into the world with briefcases and their job is to find other dollar bills. Then those new dollar bills have to find more of their friends and so on. Before you know it, you have set yourself up for a very comfortable retirement if you put the Pajama Money principles to work.
Although we have a lot of other formulas that you can work with on the Future Value Calculator, let's focus our attention on rows 36 and 37 which contain our Net Asset Values current, in five years, 10 years, etc:
In the example above, the current Net Asset Value is $1,187,318 and the five-year value is $1,893,626.26. We calculate the Pajama Money Rate as follows:
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5-Year Value – Current Value = $x – divide this by 5 to get the annual value and divide that by 12 to get the monthly value
$1,893,626.26 - $1,187,318 = $706,308.26 / 5 = $141,261.65 (annual value) / 12 = $11,771.80 (monthly value)
Of course, this is just an approximation, not a guarantee that the investment will perform as estimated, and this last part of the formula doesn't use compounding interest; it is just used to estimate.
NOW THAT I HAVE THIS NUMBER, WHAT DO I DO WITH IT?
Great question! This is where you may want to start diving into the data at the bottom of the document, considering your current annual income, the amount you need in retirement, and additional income sources in retirement such as Social Security. The Pajama Money rate will help you see if your projected income is as you expect when you retire.
What I often find is that agents don't have what they need in their retirement account, plan on keeping their home, and therefore don't have enough Pajama Money to build more Pajama Money, especially in these critical pre-retirement years. That is where owning a real estate investment (or more) comes into play. Real estate investments can often make up ground and build the Pajama Money Rate dramatically!
CAN YOU SHOW ME AN EXAMPLE?
Yes! Keep in mind our example above. The only thing we are going to do differently is tap into the primary residence equity using a HELOC and buy an investment property. We aren't even going to worry about cash flow, but we will assume the property is paying for itself plus a little more.?
Note our present equity position has not changed, but our future equity sure did. In fact, the five-year increased by over $200,000!?
Wow! An increase of $41,303 per year and $3,442 per month. And that doesn't even take into consideration the tax benefits or additional positive cash flow!
This is why I am so passionate about helping others invest in real estate. The results that my clients have seen are real and LIFE-CHANGING! A great retirement is in your grasp but you don't have a lot of years to lose waiting for a plan to magically come together. I am going to be showing agents how to put these principles to work for them at my upcoming Prosperity Strategy class coming to Palm Springs next month. We have a few seats left and I want to fill those with agents REALLY ready to learn how to do this. There is no sales pitch at class – we don't have an investment opportunity for you to buy into or anything like that. Only real education and tools to empower you to take the knowledge and apply it.
I hope I will see you there!
By Denise Lones CSP, M.I.R.M., CDEI - The founding partner of The Lones Group, Denise Lones, brings nearly three decades of experience in the real estate industry. With agent/broker coaching, expertise in branding, lead generation, strategic marketing, business analysis, new home project planning, product development, Denise is nationally recognized as the source for all things real estate. With a passion for improvement, Denise has helped thousands of real estate agents, brokers, and managers build their business to unprecedented levels of success, while helping them maintain balance and quality of life.