- (( target sum / starting sum ) ^ ( 1 / no.of years) ) - 1 = compound interest rate required.
- at 6% per annum growth:- 72/6 = 12 years for a sum to double
- over 12 years:- 72/12 = 6% growth required to double it
Thought I would try to give a glimpse of visualising a financial goal (unattainable as it might first seem) and how it might be converted from just wishful thinking into something more tangible and achievable that might help you to manage risk.
Like a great many people I have often dreamt about being a millionaire and then allowed the cold water of reality to wake me up.
But, to be fair, I have always invested with a base plan, the origins of which came from reading an article with the catchy headline "How to make a million by the time you are 65!".
To be honest though, it would have been easy at that stage to just dismiss this as yet another get rich scheme (albeit not that quickly).
The basis of the article was an interview which pitched this question to a successful fund manager. Now there is no claim that the idea is original and when I try to find the source article today (it is was some years ago and in a pre-broadband age) there are a myriad number of articles along a similar veins.
The thing that caught, and held my attention was not the how of making a million, but the fact that the numbers stacked up. It was a calculation that, with the right variables, achieved the magical figure of £1m by the time you reached 65.
Again, considering the timescales, it would have been easy to consign the article to a pile for tomorrow's chip wrapper but the formula and its variables intrigued me as it was clear that the variables could be tweaked to model a number of outcomes.
Anyway, lets talk numbers.
The first step in any plan is always a difficult one particularly as it you might be looking for some kind of confirmation that the time/energy being invested is worth it. In this case, the first step and milestone you are aiming for, is to save and invest your way to achieving a sum of £30,000 by the time you are 30. And, yes this is a challenge in itself but it is a more touchable amount than £1million is.
And the second step, well, it doesn't get any easier as you need to invest the saved sum of £30,000 in order to achieve 10% net gain per annum for the next 35 years. Achieving 10% will add £3,000 to the starting sum in the first year; £3,300 in the second year; £3,630 in the third year and so on and so forth.
Finally, by achieving these 2 steps and allowing the magic of compounding to do its work you will reach the £1million target by the age of 65.
As before, the timescales, the starting sum and the 10% per annum will be enough for most people to dismiss the plan, which is probably why there are many of us who will only ever dream of being a millionaire. But, I did mention that the formula has variables so it can be tweaked to better fit your personal circumstances and targets, but it still requires discipline and a whole lot of luck!
For example, the second step takes the £30,000 sum and sets you the objective of achieving a 10% annual return. It may be that you think 10% is ambitious or brings too much risk with it. But the plan doesn't say that you can't continue any saving habit that got you to the £30,000 in the first place.
What if you continued to add £100 per month? Well, that would be £1,200 added to the starting sum in the first year, which would equate to a risk free 4% leaving 6% (or less) to come from investing the starting sum.
This could allow you the option to split the starting sum between bank accounts and riskier investments in order to manage your risk exposure.
Better still, what if you could invest and achieve the required 10% but continue to save, effectively achieving 14% in the first year. Well, that would knock 5 months of your planned timescale to achieve a million and this compression of the plan would continue to benefit through compounding if you continued to add £100 per month.
Alternatively, the additional supplement of saving could act as insurance against years when 10% may not be achieved, or it could allow you to start with a lower starting sum but continuing to save until you dovetail back into the plan at a different starting point e.g £30,000 at 32 but then adding savings until you catch back the 2 years.
The biggest downside for me is still the 65, and the effect of inflation. So realistically I have had to ask myself if I actually need £1million to live comfortably and how much would that be worth once inflation has taken its inevitable margin.
Could I live comfortably with £500,000. You need to remember that you are likely to have other things on the go at the same time such as pensions, property etc so this is just one leg of your personal finances.
Hopefully, this will help you (as it does me) to break down your aspirations into more reachable goals and give you the necessary patience to sidestep some of the riskier pitfalls for investments that are better suited to your investment style and appetite for risk.
It isn't anything like waiting for a bus, so I won't use that metaphor but, should you pass up an opportunity because of perceived risk, you can be certain that another more suitable opportunity will come along.
Note: that is a root to the power of, not a square root, e.g a 35th root for 35 years. So a scientific calculator is required.
For a short term target there is also something called the rule of 72 which is a rough estimate of how long it will take a sum of money to double given an assumed growth rate.
For example:
Like a great many people I have often dreamt about being a millionaire and then allowed the cold water of reality to wake me up.
But, to be fair, I have always invested with a base plan, the origins of which came from reading an article with the catchy headline "How to make a million by the time you are 65!".
To be honest though, it would have been easy at that stage to just dismiss this as yet another get rich scheme (albeit not that quickly).
The basis of the article was an interview which pitched this question to a successful fund manager. Now there is no claim that the idea is original and when I try to find the source article today (it is was some years ago and in a pre-broadband age) there are a myriad number of articles along a similar veins.
The thing that caught, and held my attention was not the how of making a million, but the fact that the numbers stacked up. It was a calculation that, with the right variables, achieved the magical figure of £1m by the time you reached 65.
Again, considering the timescales, it would have been easy to consign the article to a pile for tomorrow's chip wrapper but the formula and its variables intrigued me as it was clear that the variables could be tweaked to model a number of outcomes.
Anyway, lets talk numbers.
The first step in any plan is always a difficult one particularly as it you might be looking for some kind of confirmation that the time/energy being invested is worth it. In this case, the first step and milestone you are aiming for, is to save and invest your way to achieving a sum of £30,000 by the time you are 30. And, yes this is a challenge in itself but it is a more touchable amount than £1million is.
And the second step, well, it doesn't get any easier as you need to invest the saved sum of £30,000 in order to achieve 10% net gain per annum for the next 35 years. Achieving 10% will add £3,000 to the starting sum in the first year; £3,300 in the second year; £3,630 in the third year and so on and so forth.
Finally, by achieving these 2 steps and allowing the magic of compounding to do its work you will reach the £1million target by the age of 65.
As before, the timescales, the starting sum and the 10% per annum will be enough for most people to dismiss the plan, which is probably why there are many of us who will only ever dream of being a millionaire. But, I did mention that the formula has variables so it can be tweaked to better fit your personal circumstances and targets, but it still requires discipline and a whole lot of luck!
For example, the second step takes the £30,000 sum and sets you the objective of achieving a 10% annual return. It may be that you think 10% is ambitious or brings too much risk with it. But the plan doesn't say that you can't continue any saving habit that got you to the £30,000 in the first place.
What if you continued to add £100 per month? Well, that would be £1,200 added to the starting sum in the first year, which would equate to a risk free 4% leaving 6% (or less) to come from investing the starting sum.
This could allow you the option to split the starting sum between bank accounts and riskier investments in order to manage your risk exposure.
Better still, what if you could invest and achieve the required 10% but continue to save, effectively achieving 14% in the first year. Well, that would knock 5 months of your planned timescale to achieve a million and this compression of the plan would continue to benefit through compounding if you continued to add £100 per month.
Alternatively, the additional supplement of saving could act as insurance against years when 10% may not be achieved, or it could allow you to start with a lower starting sum but continuing to save until you dovetail back into the plan at a different starting point e.g £30,000 at 32 but then adding savings until you catch back the 2 years.
The biggest downside for me is still the 65, and the effect of inflation. So realistically I have had to ask myself if I actually need £1million to live comfortably and how much would that be worth once inflation has taken its inevitable margin.
Could I live comfortably with £500,000. You need to remember that you are likely to have other things on the go at the same time such as pensions, property etc so this is just one leg of your personal finances.
Hopefully, this will help you (as it does me) to break down your aspirations into more reachable goals and give you the necessary patience to sidestep some of the riskier pitfalls for investments that are better suited to your investment style and appetite for risk.
It isn't anything like waiting for a bus, so I won't use that metaphor but, should you pass up an opportunity because of perceived risk, you can be certain that another more suitable opportunity will come along.
Some useful forecasting tools.
How to calculate the required compound interest rate:
Alernatively, modelled in excel, it looks like this:
For a short term target there is also something called the rule of 72 which is a rough estimate of how long it will take a sum of money to double given an assumed growth rate.
For example:
Post Title
→How to make a Million (by the time you are 65)!
Post URL
→https://national-grid-news.blogspot.com/2011/01/how-to-make-million-by-time-you-are-65.html
Visit National-grid-news for Daily Updated Wedding Dresses Collection
