How Much Can I Save?

The question often comes up “how much can I save in 20 years if I put away $2000 a year and earn 9% interest?”. We have simplified these types of calculations by putting a spreadsheet on our website (member’s area on the Tools tab) called “12 dollars a day”. With this spreadsheet you can quickly calculate how much putting away X number of dollars per day will eventually grow to. As an example, let’s say you want to save $2000 per year. Divide this by 365 (the number of days in a year) and you will find that you need to save $5.48 per day – the cost of a coffee and a donut for some people. Plug this number in the spreadsheet in the yellow cell (only change yellow cells on this sheet – if you mess it up, download it again) called “savings per day”. Make sure the “initial balance” cell is zero and change the “growth” cell to 9%. Change the “marginal tax rate” to 0%. Now look at the 19 year line! Wow - that coffee and donut has grown into $100,000. Many of our Scrooge Guide readers have worked at jobs for over 19 years and don’t have $100,000 socked away. Do you see now why we say to “budget to create excess, and then invest that excess”? You can play around with the numbers. For instance let’s say you start off with $10,000 to invest and then add $5.48 per day to that. Put the $10,000 in the “initial balance” cell, press enter and you will see you now have almost $152,000 in 19 years.
Suppose now you think you can get a better return rate than 9%. Change the growth rate to 12% and you will see that the 19 year value is now up to $228,000!
Finally, let’s look at what happens when you invest this in a tax-sheltered investment and reinvest the tax refund. Assume you are in a 45% top marginal tax rate and your refund will be based on that. To do this simply put 45% in the field marked “marginal tax rate”. Now look what happened! That coffee and donut just turned into $292,000! That’s enough to convince me to give up my snacking habit!
Scrooge