Unlock the Secrets of Wealth Preservation with the 2/12 Rule
In the pursuit of wealth, society emphasizes the art of making money and building a solid foundation for financial success.
However, one crucial aspect often overlooked is wealth preservation.
Today, let's dig into this often neglected topic.
Allow me to share with you the 2/12 rule, a gem of wisdom bestowed upon me by some of my mentors and billionaire clients.
For any individual seeking to safeguard their assets and wealth in today's inflationary economic climate, this rule becomes paramount.
Navigating the challenges posed by economic volatility requires strategic thinking and a prepared mindset.
Yet, volatility also unveils hidden opportunities. To capitalize on these opportunities, you must possess or have access to the necessary financial means for investment.
Suppose you were to ask a person of reasonable intelligence, who has inherited or won a million dollars, how much they could spend annually while preserving the principal?
In that case, the answers would vary wildly.
This is where the 2/12 rule comes into play, offering a reliable approach to wealth preservation and portfolio defense.
If you aspire to preserve your wealth, let this unofficial rule guide you on your journey.
To start, examine your living expenses closely.
If they surpass 2 percent of your net worth, it's time for a deep dive.
Living beyond 2 percent of your net worth places you closer to a stressed position, whereas those who live on less than 2 percent enjoy a more secure standing.
In short, individuals living on less than 2 percent of their net worth annually are likely to reside in a safe zone.
Conversely, choosing to exceed this threshold could potentially land you in a yellow zone.
Of course, there exist numerous variations to this concept.
If you have corporate pensions, operate a cash flow positive business, or enjoy other special arrangements resulting in regular cash flow, you likely have the capacity to spend more than 2 percent.
Personally, I prefer to hover between 10-15 percent as a conservative approach.
However, for those individuals who rely solely on a pool of capital for their livelihood and investments, adhering to the 2 percent rule generally ensures enough funds to cover taxes, inflation, and preserve the principal.
Accompanying the 2 percent rule is another critical figure: 12 percent – the ideal percentage of assets allocated to cash. (Personally, I prefer 15-20 percent.)
Maintaining 12 percent of your assets as cash while living on 2 percent offers three significant advantages if wealth preservation is a top priority:
1. It provides a safety net of approximately five to six years' worth of capital, enabling you to weather predictable financial storms based on historical trends.
2. Keeping 12 percent in cash prevents the need for forced liquidations to raise funds. Selling assets due to cash considerations often leads to unfavorable investment decisions. Instead, you can make informed choices based on the perceived value or lack thereof in your investments.
3. A healthy cash reserve grants you the flexibility and agility to seize unique opportunities as they arise. Cash opens doors during exceptional times, allowing you to acquire remarkable assets that competitors, lacking sufficient cash, cannot grasp.
Indeed, cash can still reign as king.👑
If your goal is to preserve wealth for generations to come, embracing the 2/12 rule – living on 2 percent of your net worth while allocating 12 percent to cash – equips you to withstand any storms that come your way.
It shields you from untimely liquidations and, on rare occasions, positions you to seize highly lucrative opportunities during extraordinary times.
I must say that the 2/12 rule is not the ultimate solution for wealth preservation. And I am not a financial advisor, I’ve just had the privilege to learn from those who have benefited from this formula.
It represents a conservative approach among many strategies available.
Nonetheless, could you live on 2 percent of your net worth?