Wow, it has been forever since I posted on this blog, but a friend of mine from high school likes posting things on Facebook that I really can't resist commenting on. This is especially true when it's about politics and economics at the same time. I'm a sucker for it, but luckily, he's not offended by my assertions I'm right, and is capable of making a logical assertion that I'm wrong. It stimulates thought instead of provoking ill will, at least in my mind (he may want to kill me, but we both agree on matters of gun control..........I think). Anway, here is something that I posted, that I thought might have more value than just a comment on Facebook.
Most people wouldn't justify not buying a flat screen because it costs them 3700 in 30 years to spend 1000 today, but it's how the wealthy think. Most people just think about that TV. I use it justify buying cattle though. The Millionaire Next Door would blow a lot of people's minds about what "wealthy" really means in monetary terms. It's fairly cheap on Amazon. Rich Dad Poor Dad is another one. I am not flawless in my quest to save money. Clark Howard makes me look like a wasteful spender, but he's the master of not spending money. Either way, it is better to save for tomorrow than today. Here is my logic behind it.
I wish this was there when I was in college (believe me, I searched). This is a pretty comprehensive view of the variations on the TVM function, but I mostly posted it for mathematical proofs if you don't believe me. It's probably easier to read my numbers since I did the math assuming a 4.5% interest per year.
"Time Value of Money" basically means that if you invest 100 today, you expect to see 100 + # in a set period of time. Basically if you want to have a million dollars in 30 years (retire at 55?), assuming a 4.5% rate of return annually, the function would read PV = 1,000,000/(1+.045)^30. PV = $267,000.02 in a lump sum. Of course, then we throw continual payments into the mix. This is also how loans are calculated (but if you want more detail, send me a message). It'll take $16391.54/year to have $1 million in 30 years. It'll pay 45K per year without losing value, but if you figure you'll only make it to 70, it'll pay you $93,113.81/year for 15 years.
Now, that seems nearly impossible, but the good news is, that you don't have to put away $16,000 this year. Most of us at my age (25 years old) are going to work until we're about 60-65. That gives us only $9343.15 per year in payments. If you make a monthly payment instead, the payment actually drops to roughly $750 per month. That new shiny car could cost you a million dollars. At 30% of income, that would mean you only make $30,000 per year. With the current tax rate, you'd have to have pre-tax income of roughly $40,500. Still, where there is a will, there is a way and these are just rough numbers so don't fret if you're not making this much money per year. There are also plans that are based on increasing payments and all other types of formats, but they're harder to calculate.
A calculator is found here in an easy to use format.
PV = How much money you have today. I like to use 0.
Rate = Interest Rate or how much you expect to gain. 3.5-4.5 per year is a fairly safe investment strategy. You won't get rich quick. Of course, nothing is 100% and investing does have risks of loss. Diversification will help that and consulting a professional is always recommended. Some would argue that 4.5% is bold right now, but I think it can still be done.
PMT = Payments. 0 will calculate lump sum investments and their gains
FV = How much money you get paid at the end.
Periods = Years, months, or whichever denomination you choose from the drop down box.
There are infinite ways to increase personal wealth. The path to increasing the wealth of nations lies within the path of increasing individual wealth. That is best done individually, but we all benefit from economic growth.
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