Yesterday I showed you an easy way to calculate the capital you need to be able to retire. Today I will show you another easy way to calculate the future value of the capital you require.
Let me say this at the beginning: this is not 100% accurate, but it is close enough.
Today we will focus on the first part of the Rule of 72. The Rule of 72 says that any amount of money will double in value by the result of 72 divided by the rate.
Let’s simplify. Let’s say that you invest money at 9% per annum. Then the Rule says: 72 divided by 9 = 8. Therefore your money will double in value every 8 years. So, if you invest R10 000 at 9% pa, it will grow like this:
|
After |
8 |
years |
= |
R20 000 |
|
|
16 |
years |
= |
R40 000 |
|
|
24 |
years |
= |
R80 000 |
Now you can do the same with the figure we used yesterday. If your income increases by inflation every year and inflation equals 6%, and we stick with the R10 000 we used yesterday, it looks like this:
|
After |
12 |
years |
= |
R20 000 |
|
|
24 |
Years |
= |
R40 000 |
|
|
36 |
Years |
= |
R80 000 |
Unfortunately life is not always as simple as this. So what do you do if the rate is 10% which means it doubles every 7.2 years? It’s only slightly more complicated, so bear with me. So let’s say we want to know the value in 20 years’ time (Incidentally, even if the rate was 12%, you would still do this).
|
Step 1: |
20 / 7.2 |
= |
2.8 |
|
Step 2: |
R10 000 X 2 |
= |
R20 000 |
|
Step 3: |
R20 000 X 2 |
= |
R40 000 |
|
Step 4: |
R40 000 X 1.8* |
= |
R72 000 |
- *Step 1 & 2 refers to the 2 in the factor of 2.8. If the factor was 3.8, you would double a third time. The 1.8 in step 4 is 1 + 0.8, so that you increase the answer in step 3 by 0.8. Just remember that when you work from present to future you have to multiply the last step by 1 + the fraction.
So, how are you going to use this newly acquired skill?
|
Step 1: |
Use the assumed inflation rate and the Rule of 72 to see every how many years your salary |
|
Step 2: |
How many years do you have to retirement? |
|
Step 3: |
Divide your years to retirement by the answer in #2 |
|
Step 4: |
Now calculate your salary in the year you retire. |
Example:
|
Step 1: |
Assume and inflation rate of 9%. |
||
|
Step 2: |
20 years to retirement |
||
|
Step 3: |
Salary will double every 8 years |
||
|
Step 4: |
20/8 |
= |
2.5 |
|
Step 5: |
R10 000 X 2 |
= |
R20 000 |
|
Step 6: |
R20 000 X 2 |
= |
R40 000 |
|
Step 7: |
R40 000 X 1.5 |
= |
R60 000 |
Therefore my salary in the last year will be R60 000 per month.
Example 2:
Yesterday we calculated that if we retired TODAY with R10 000 per month increasing at inflation and investment return equals inflation the capital we will need is R2 400 000.
Now see how much that will be 20 years hence:
|
R2 400 000 X 2 |
= |
R4 800 000 |
|
R4 800 000 X 2 |
= |
R9 600 000 |
|
R9 600 000 X 1.5 |
= |
R14 400 000 |
R14 400 000 is the capital I will need 20 years hence.
I LOVE FIGURES. Check your calculations!
R60 000 X 12 X 20 = R?????
Now do the calculation for yourself. I would LOVE to hear your comments. So please let me know.
Tomorrow we look at the other part of the Rule of 72. And the next day, which is Friday, I will give you the scary news.
But please, do the calculations for yourself and even bigger PLEASE, talk to me.