Monday, February 1, 2010
Do Financial Forecasting
Tip #228 - Do Financial Forecasting. Sometimes it’s mentally difficult to put money away in a savings account month after month. After all spending that same money at the store for a trendy purse, a pair of jeans, or a new garden tool has much more instant gratification. Putting the money into a savings account just isn’t as exciting. So why not make it more exciting? If you are savvy with a spreadsheet program like Excel then put in some formulas that calculate how much money you will have after 12 months of savings, after 5 years of savings, or after 20 years of savings. Then to make it even more fun, put in the interest rate that you expect to earn on this money to see how much it will grow. Putting everything down in black and white and seeing how much money you will have if you stick to your plan makes if much more fun to save money. If you don’t know how to use a program like Excel, then set up a table with paper and pencil.
Either way you do it, you can make it as simple or as complicated as you like or are able. You can put the months down the left column and the years across the top. Enter the amount you put away each month. And total the columns on the bottom. Or you can make it more sophisticated and do it by a yearly basis with the years down the left column and expected additions and projected interest rates across the top.
The key to this exercise is to make it more exciting to save your money. Putting $200 per month toward clothes and accessories will be a fun thrill each time you get your new product. But at the end of the year, you will just have a closet full of nice clothes. At the end of 3 years, you might have a closet full of out-of-date clothes. And at the end of 5 years, you might have a closet full of no-longer-fit clothes. Instead putting $200 into a savings account each month will leave you with $2400 in your savings account after 1 year, $7,200 after 3 years and $12,000 after 5 years. After 20 years you would have $48,000! And that’s without interest! And in a measly 1% or 2% interest that banks are paying these days, and you are looking at more than $12,500 after 5 years, and over $58,000 after 20 years. Suddenly, putting $200 away each month looks more attractive.
With Excel, you can also come up with different “what if?” scenarios. What if I put $300 away each month instead of $200? What if I put my money in a CD for 5 years at 3% or for 7 years at 4%? What if I can only afford $50 per month?
If you find it hard to put money away each money because you enjoy spending it more, then do this exercise, which shouldn’t take more than an hour or two to put together. And then start plugging in the numbers. Suddenly saving money becomes lots of fun!
In Real Life (IRL) - When I was in my 20s and had just started putting money away on a monthly basis, I set up a spreadsheet that calculated how much I would have in my savings account if I continued to put $250 away per month for 5 years, 10 years, 20 years, and until I was 60. As the years went by I adjusted my figures to more accurately reflect what I was actually putting away and the interest rates I was realistically expecting. Back then, I was counting on 10% per year! That was certainly wishful thinking on my part, but at the time, that’s the interest rate I was earning, if not more. The original spreadsheet I did is lost on a 3 ½ inch floppy somewhere, but I did find another spreadsheet I made about 1998. It is above (click to read it) and includes:
--The amount of savings I had at the beginning of the year.
--The amount of interest I expected to earn on the beginning year amount (I adjusted it to 5% in this example to be more realistic),
--The projected amount of additions which included my regular savings ($500 per month) plus the amount we expected to save in our IRA accounts.
--To the far right is the actual savings and additions I made so I could adjust the beginning year amount to the correct figure as the years went on.
--I also had a column that calculated our 401k contributions based on our expected salary, but I took that out for save of simplicity.
Looking back at it, many of my predictions were all wrong. My husband’s salary grew much faster than I predicted, and I stopped working altogether. The IRA contribution limit increased per year per person, and the interest rates obviously are much lower than in the late 90’s. But all in all, it was a fun exercise that kept me motivated to save. I clearly didn’t keep up with my projections as life got busy with children, but it was fun and motivating when I did it.
On a technical note, how do we share Excel spreadsheets without taking a picture of them? I am clearly limited in the technology aspect of blogging! Thanks for any help anyone can give me.