If you were to pick anyone out on the street and ask them what their networth or savings would look like in exactly 10 years, many would have no idea where to begin even figuring out such a task.
However doing so its not so hard, no more than some basic arithmetic. Before I lose your interest because I’m speaking about that offensive four letter word M-A-T-H.
Hear me out, I’m far from being anything but entry level at most types of math. But some basic information gathering and simple math formulas and you can forecast your savings to find out what you need to do to achieve your goals or if your on track to achieving those goals.
Data is the new Oil!
Getting started takes some time since you need to first track your savings or net worth on a monthly basis, this should be done religiously so you have good data to forecast your future networth/savings. Keep it simple, this doesn’t have to be some crazy spreadsheet with all the bells and whistles. All it really needs to be is your total net worth or savings accounts tracked monthly, the more data you have the more reliable your calculations will be.
Of course there’s always unexpected situations and economic hurdles that could totally throw off your projected outcome it still is better to have some idea of where your headed than none at all.
The magic begins with a simple formula
I = P * r * t
Interest = Principal * Rate * Time
To put this into practice lets assuming a 30 year old who has been aggressively saving for the past 10 years and have a net-worth of $250,000.
From that aggressive saving they have also been charting their monthly growth/change of net worth for the past 10 years so its a somewhat solid and stable rate of growth, lets assume its around 1.25% per month which works out to currently be a after tax/costs income of around $3,125.
Knowing this info we can throw that formula into effect to find out what the estimated net-worth of this individual will be at the age of 40.
Interest = 250,000 (Principal) * 1.25% (Rate of Savings/Growth) * 10 Years (Time)
Lets put this into something easier to run into our calculator, since we our rate is percentage lets convert that to a number instead of percent which is (0.0125). Also our rate is based on monthly growth we have to change our 10 Years into the equivalent amount of months which is
10 (Years) * 12 (Months in a year) = 120 Months.
So lets try this again,
Interest = 250,000 * 0.0125 * 120
Interest = 375,000
So now we see that over 10 years at the same growth their net worth will increase by 375,000 giving them a total net-worth of the principal + interest.
250,000 + 375,000 = $625,000
So this individual can now expect if they stay on track with the same growth rate they will have a total net worth of $625,000 by the time they are 40. If that doesn’t seem like enough if their are aiming for early retirement they could try to find out how much % of growth they need per month to achieve lets say $1,000,000 or their desired target.
Hopefully this helps you track your finances a bit better or gives you a reality check on where your headed.
Don’t forget, everyone starts at different levels but where you end up is only decided by you!