A couple of year ago, I read an article on how a millionaire is made $10 bucks at time by Mr. Money Mustache and I couldn’t agree more. Quite often, we come across articles on how X number of dollars saved & invested every month turn into a large amount Y years later. So I thought, wouldn’t it be nice, if I could develop an interactive dashboard that will allow me to change all these savings parameters and see how much I will have saved after a certain number of years? This dashboard is a result of those attempts. (link)
Assumptions & Methodology:
The goal of the dashboard is to illustrate the impact of saving and immediately investing those savings in tax efficient and low cost investments ( e.g. index ETFs by Vanguard). To make this relevant for a majority of readers, I had to make some assumptions. We compare the effect of additional savings and investments against a baseline scenario. We assume a family with zero initial savings starts savings $10,000 dollars in cash and contributes another $10,000 in pretax retirement account including employer contributions. All of the savings are invested in the same month that they are realized and annual investment returns are 9.5%. The returns are compounded monthly. Users can change various parameters to make it more relevant for them. For example, you could specify how much per month you are saving by making simple lifestyle changes such as cutting cable, driving fuel efficient pre-owned cars, etc.) and see what those changes will mean in how much you will have saved a certain number of years from now.
Data Source and Tools
The data source behind this is simple worksheet with one row for one month, record counter, and a dummy date. Most the data displayed in the visualizations is generated based on the user selectable constant values. Tableau is used create the visualization.
The format of each record is as follows:
1 1 10 1/1/2000
The first column is record number, the second column is month number, the column is a constant number, and the last column is a constant date.
Taking this hypothetical scenario and using the parameters in the dashboard, I will be able to reach $1 million in total savings in year 2025 instead of reaching that target in year 2033, i.e., 8 years earlier. What will it take me to reach $1 million in total savings 8 years earlier?
1. Increase annual cash savings from $10,000 to $20,000, bump up pre-tax household retirement contributions to $24,000
2. Cut cable TV ($60), switch to less expensive cell phone plan ($60)
3. Use more fuel efficient used car that is fully paid off and save on insurance premium ( $100) and depreciation
4. Increase home energy efficiency and reduce water consumption
5. Contribute to FSA Healthcare and dependent care accounts
6. Get at least $1000 per year in annual credit card rewards
7. Start earning at least $500 per month in a side gig
Making all of the above changes alone with zero baseline savings and contributions, you will have $1 million in additional savings in 13 years. Pretty impressive, isn’t it? In future articles, we will look at each of the above savings and investing opportunities in detail. In the mean time, play with the numbers and let me know your feedback.