One of my favorite “Savings Speeches” comes in David Bach’s book Automatic Millionaire. David goes on to explain in detail how to save and invest your money, but only after giving a very convincing argument for why you would want to.

I’m going to share with you the thought process I went through as I tried to figure out how much to save and when. First, download the InvestorGeeks Future Wealth Calculator. This is an interactive article.


Hopefully, everyone at some point hears the “Savings Speech”. If you’re lucky, your parents have given it to you. Maybe heard it from a high school math teacher or a college economics professor. Maybe you heard it during your on-boarding at work. Maybe you haven’t heard a good savings speech yet. The gist of the message is this:

“You should save money… and the sooner the better.”

If you haven’t already, download the InvestorGeeks Future Wealth Calculator (IGFWC). (For those without Excel, an online version of the spreadsheet is coming soon.)

There are a few different worksheets in the IGFWC:

The first, “Estimated Investments”, can be used to predict what your future wealth will be based on a number of factors including your percentage of salary invested, estimated annual raise, and salary peak. The default values given are rough estimates for my personal situation: a recent college grad working in consulting, expecting to get to the manager/senior manager level. Starting at a salary of $47k with 10% pay raises per year up to $150k, I could build a nest egg of over $1.8 million in 25 years. I use an average inflation rate of 3% and an average annual return of 9%, the same numbers used by CNN’s Savings Calculator [1].

The second tab is a chart based on the Estimated Investments worksheet. The chart shows clearly the difference between saving/investing your money vs. spending it. The “law of compound interest” ensures that your total wealth grows at an exponential, rather than linear, rate [2].

The third worksheet is a form which, besides being a good example at how a saver/investor thinks, can be used when making a car purchase decision. The “Car Example” worksheet shows how much you could make by buying a used car instead of a new one and investing the difference. The default values of $25k for the new car and $14k for the used car are about equivalent to the current difference between a brand new, fully equipped 2006 Mazda3 s Grand Touring [3] and a used, modestly-equipped 2004-2005 Mazda3 Sedan [4]. By saving $11k now and investing that money, you would have enough money in 25 years ($63k) to buy a BMW or Mercedes. Just in time for that mid-life crisis!

Play around with the calculator and let us know what you think. The spreadsheet isn’t perfect. There is a lot more one could model: saving for college, ramping up savings as you near retirement, the increase in maintenance-cost associated with a used car, etc. It’s a simple spreadsheet, and it should demonstrate some simple points:

  1. We’re going to use compound interest to grow our wealth exponentially rather than linearly.
  2. If you need motivation to do this, take a look at what you could be worth in 25 years (hopefully 1-3 million or more depending on your starting conditions).

If you need to know how to manage your finances to be able to save 15-25% of your income each year to retire as a millionaire at 50, keep this spreadsheet in mind when making big purchases (like a new car). If you need more help, I point you once again to David Bach’s book or CNN’s or SmartMoney’s personal finance pages.

References:
[1] CNN Savings Calculator
[2] WikiPedia: Compound Interest
[3] Mazda.com Build a Vehicle: 2006 Mazda3 with the kitchen sink
[4] Search for Mazdas under $14k at AutoTrader.com

Author’s gravatar

I’m going to have to check out that InvestorGeeks Calculator! I just started my “video blog” today. I did a post about buying a used car. I did not go into detail…I just wanted to try it out. Thanks for the post. I will tell you what I think of the InvestorGeek Calculator after I try it out.

Nick

Author’s gravatar

Hey, Nick. Thanks for your comment.

Good luck with your video blog. I think you have the right idea. The reasoning you position in you first post is exactly what went through my head when I recently bough a new (used) car.

I think the “car example” tab of the IGFWC could be updated easily to account for a new car purchase every 5 years or so and the numbers would line up more with your $250k saved number.

In any case, feel free to link to the IGFWC from your site. I think it’s a powerful visual and visceral tool to realize how much money you could save based on just this one little purchase.

I look forward to future installments of your blog.

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