Scott Burns is a financial columnist who writes for the Dallas Morning News. In his column of June 11, 2000, Scott announced a contest for money management ideas.
I'm entering the contest. Twice. Here are my two entries.
We've all heard that time is money. Here's another way to equate the two. When I'm considering a purchase, I convert the dollar amount into the number of days I'll have to postpone my retirement if I spend the money instead of saving it for retirement.
For example, let's say that I plan to retire 20 years from now with $1,000,000 in assets. If I save an extra $50 today, I could retire one day earlier. If I spend an extra $100 today, I'll retire two days later.
How'd I get those numbers? It's tricky, so hang on....
Let's suppose that my retirement account earns a steady 7% after taxes. When it has a balance of $1,000,000 it'll be earning $192/day. If I put an extra $192 into it, it'll reach $1,000,000 one day earlier. But I don't have to put the whole $192 in - I just have to put in enough that it will have grown to $192 by retirement day. If I put in $50 today, and it earns 7%, it will have reached $192 in 20 years.
Here's a table that shows how much you need to save to retire one day earlier, at several ages and several different interest rates. All the columns in the table assume you'll have $1,000,000 in assets. If you want to retire with $5,000,000, multiply the daily amount by five. And don't forget to take the whole thing with a grain of salt -- it's just a rough estimate. It also ignores the advantage of tax-deferred savings.
| How much to save today to retire one day earlier | ||||||
|---|---|---|---|---|---|---|
| Years to Retirement |
Growth Rate | |||||
| 5% | 6% | 7% | 8% | 9% | 10% | |
| 45 | $15.25 | 11.94 | 9.13 | 6.87 | 5.10 | 3.76 |
| 40 | 19.46 | 15.98 | 12.81 | 10.09 | 7.85 | 6.05 |
| 35 | 24.83 | 21.39 | 17.96 | 14.82 | 12.08 | 9.75 |
| 30 | 31.70 | 28.62 | 25.19 | 21.78 | 18.58 | 15.70 |
| 25 | 40.45 | 38.30 | 35.34 | 32.00 | 28.59 | 25.29 |
| 20 | 51.63 | 51.26 | 49.56 | 47.02 | 44.00 | 40.72 |
| 15 | 65.89 | 68.59 | 69.51 | 69.09 | 67.69 | 65.59 |
| 10 | 84.10 | 91.79 | 97.49 | 101.52 | 104.16 | 105.63 |
| 5 | 107.33 | 122.84 | 136.74 | 149.17 | 160.26 | 170.12 |
| 0 | 136.99 | 164.38 | 191.78 | 219.18 | 246.58 | 273.97 |
How do I use these numbers? Using the example of the $1500 TV from Scott's column, I can buy the TV, or I can save the $1500 and retire 30 days earlier. At that rate, the TV doesn't look so good.
Age makes the biggest difference. Someone who's in college today can "save a day" for less than the price of a CD. Could it be that Napster will create a whole generation of early retirees?
I think of my vacation balance as a savings account. Every paycheck, I put a little away. Once in a while, I make a big withdrawal. Either I take a vacation or I quit my job and convert the whole thing to cash. My vacation balance even earns interest of sorts -- when I get a raise, the account's cash value goes up.
If I think of it that way, I realize that it costs just as much to take vacation time as it would to take time off without pay and keep the vacation balance.
The only time when vacation is really "free" is when I'd lose the vacation time if I didn't use it. In my industry, software, it's common to change jobs often enough that you never accumulate that much.
I'm not saying I never take a vacation. I love road trips, and I'm always looking for an excuse to go. I'm just saying those trips are expensive: gotta pay for gas, food, hotel, AND lost wages.
Copyright 2000, Robert N. Miller. All rights reserved.
Scott Burns and The Dallas Morning News are permitted to copy this document in whole or in part, provided that they display the original document's URL, http://www.jogger-egg.com/kbob/money-tips.html.
Bob Miller,
kbob@jogger-egg.com