How Am I Going to Reach My Money Target? — Calculating My Savings Rate
In my previous blog post I calculated my desired money target. This is the amount of money I desire to have in assets according to my 10 Year Target. The next thing to do is to create a plan for reaching my target. For me, this mainly means calculating my savings rate. By taking the amount that I have, an expected yield and my desired outcome I can use a formula to find the number that I actually need to set aside in order to reach the target.
For repetition, Napoleon Hill defined these steps that you can go through to help you reach your desired wealth:
- Fix in your mind the exact amount of money you desire. Be definite about that amount.
- Determine exactly what you intend to give in return for the money you desire.
- Establish a definite date when you intend to possess the money you desire.
- Create a definite plan for carrying out your desire, and begin at once, whether you are ready or not, to put this plan into action.
- Write out a clear concise statement of the amount of money you intend to acquire, name the time limit, state what you intend to give in return, and describe clearly the plan which through you intend to accumulate it.
- Read your written statement aloud twice daily, once before retiring at night, and once after arising in the morning. As you read — see and feel and believe yourself already in possession of the money.
This blog post is about number 4.
How Am I Going to Reach My Money Target?
The desired amount I desire to reach according to my calculations is 5,000,000 NOK (≈ 580,000 dollars). On my “about page” I write that I already possess 2,000,000 NOK. That means that to reach my desired money target, I need 3,000,000 NOK in the next 10 years. So, how am I going to do that? I am no wunderkind that will invent the next big thing, nor am I on a career ladder that will make me the amount as a Christmas bonus for landing a big sale. No, I will reach my target in the same way that anyone can reach their targets.
My 3,000,000 NOK will come from two simple things: Savings and ROI.
My plan is to reach the desired target like this: I want to rely on a high savings rate that will act as a basis. Then I will add a conservative yield. The savings rate is the easiest to adjust and also what will generate the highest amount. Also, over time I can expect to add more to my savings based on higher salary or multiple income streams. The yield will act as a multiplier that will then make the saved up amount grow even more.
I am able to influence the yield also, though not as much as the savings rate, and it comes with a higher risk. The way I try to obtain a risk-adjusted yield is to use my savings to buy stocks (mainly dividend-paying stocks), shares of mutual funds and buy some other assets that will give me passive income.
I will use a return on investment of 6% which is a little below than average returns of the S&P 500 over time. I like to be more careful since we do not know what the future will bring, and in an investment perspective, 10 years is not very long. If I in 10 years have an average yield above 6%, this comes as a bonus and I will reach my target faster.
Calculating My Savings Rate
Since we have already established that the return on investments I use as a basis is 6% and the target amount is 5,000,000 we can use a formula to find out how much I should save to meet the target. I found this formula and its descriptions on the Calculator Site.
Putting in my own numbers I get:
A = 5,000,000
P = 2,000,000
PMT = X
r = 0,06 (6%)
n = 12 (since I am looking for monthly payments)
t = 10 (years)
As you can see I need to turn the formula around a little since PMT my unknown, and not A as is intended in the formula. But no worries. I end up with this calculation:
5 000 000 = Future values of a series + compound interest for principal
5 000 000 = 2 000 000 (1+6%/12)^(12*10) + PMT * (((1 + 6%/12)^(12/10) — 1) / (6%/12))
5 000 000 = 3 638 793 + PMT * 163.88
PMT = (5 000 000–3 638 793 / 163.88
PMT = 8,306 NOK
My Monthly Savings
The formula tells us that I need to save an average of 8,306 NOK pr. month. This is approximately 960 dollars. My base salary as it is today is about 30,000 NOK a month. This means that my savings rate needs to be about 27% of my present salary. 27% sounds manageable I think. But since you can never trust that future returns will be the same as previous I will, of course, try to save even more in order to reach my target sooner. And since we are talking about an average over 10 years I can assume that I will make more money over time that will lower the savings rate.
«Too Easy Mr…»
When I posted this blog post on Twitter I received immediate reactions that this was going to be waaaay too easy.
Yes, I totally agree. The target and the savings rate is too moderate. So, let’s do the calculation once more. The previous calculations we now call «calculations for financial freedom». The new calculation is for my target. If I accept the challenge from Route2FI I would end up with a savings rate of, let’s see… 126%. That sounds a little too extreme. Even for you.
But I meet you on the way. As a challenge, I will raise my target to 6,500,000 NOK (about 745,000 dollars). This means my monthly savings need to be 17,450 NOK (2,000 dollars).
This is well above my present savings rate. Today I save approximately 9,000 NOK each month. Of course, the number above is an indication and it is an average (even though the earliest money gets most compound interest effect). But I need to step up my game to reach this target. Earn more. Save more.
Challenge accepted!
10 Year Target – -> 650,000,000.
Saving rate based on today's salary – -> 58%
What is your savings rate? And have you calculated what your savings rate will give you in future value? Please let me know in the comments below.
