How to use Finance101 compounding calculator

This is a “How To” for how to use and understand what the Finance101 compounding calculator is doing.

A few upfront definitions:

  • Contribution – the amount of money that YOU put into an account. You can also consider the portion that your employer matches as a contribution.
  • ROI – acronym for “Return On Investment”, which is also known as the interest rate you earn
  • Compounding frequency – how often the interest is compounded, this can be anywhere from daily for some savings/CDs, to annually – which is normal for analyzing your stock portfolio
  • Portfolio – an account that you deposit money into, to earn money. Also known as investment account, or Stock Portfolio. Obviously this is different than a model’s Portfolio (which are professionally taken photographs of the model in various poses)
  • Brokerage account – An account that you can put investment money into, and withdraw money as you want to, but have to pay taxes on the withdrawals when you file your taxes.

If you click on the File menu and then the New sub-menu, you will see a list of views that you can display.
The one listed next to the last is the “Compounding” view, and the screen below is displayed when you click on the OK button to open the highlighted view.

Finance101_compounding_form

The purpose of this view is relatively simple. Given certain information such as Interest Rate (ROI), compounding frequency, contributions, and the starting age & ending age when you make your contributions, how much will you have in the account at a given age?

Currently the amount I have defaulted the Contribution field to is $4,000, because at the time that I wrote the program, that was the maximum amount that you could put away into an IRA. As of the year 2013, the maximum contribution limit is $5,500/yr.

As you can see, if you want to have $891,718 when you reach the age of 65, just make sure to put away $4,000 each and every year from ages 17 – 21. Notice that you’re putting it away for 5 years (ages 17, 18, 19, 20, & 21). If you change the contribution to $5,000, you’ll notice that you will have over $1,100,000! If you contribute the maximum amount of $5,500 it pushes the amount the account will be worth to over $1.2M!!!! :-)

The reason that I have 2 columns Info for ‘A’ and Info for ‘B’, is simply so that you can see what a difference time has on compounding your money. So if you put away the maximum amount of money when you are younger and don’t touch it until you are within standard retirement age, you will amass a large amount of wealth. If you keep $4,000 as your contribution every year, and you don’t start putting away until you are 30 years old (the default is 26 for ‘A’), you will have to keep putting that same $4,000 every year until you are 65 years old to get the account to be worth almost the same amount if you had simply put that money away when you were younger.

As you can plainly see, putting $20,000 out when you are younger (ages 17 – 21), will save you from having to put away $152,000 for 27 years!

Am I suggesting if you are older (say 40 years old), and haven’t put anything away for your retirement that you’re doomed to work forever, even if you don’t want to? Absolutely not! The simple fact is that the sooner that your start putting money away, the more comfortable you’ll most likely feel when you get older and want to take a day off work but you can’t because you still have bills that you won’t be able to pay without working.

Hint: In order to see what the total account value would be after you’ve reached a certain age, you can scroll down the list at the bottom of the view. If you scroll all the way to the bottom, you will see how much the account is worth at the very end (which is a combination of the Total Earnings field and Total Contributions field.

Now, where things really go crazy, is when your employer matches your contributions. So, if your employer matches every dollar that you put into your 401k or IRA, make sure that you take advantage of that right away! After all, if you put in $5,000/yr and your employer puts in $5,000/yr, you only have to do that for 5 years and let it sit until you are 64 years old in order to have the account be worth over $2 Million!!!! :-)
That is also the reason that once you put money into the account, you don’t want to take it out unless you no longer work for that employer anymore. That’s when it’s time to transfer the money from that account over to a different account. I’ll talk about this in the future.

Go to the Finance101 calculator home page
How to use Finance101′s “Finance 101 view”
How to use How to use Finance101 amortization calculator
How to use CAGR view

This entry was posted in 401k, financial directive, Retirement Savings, spending plan and tagged , , , , , , , . Bookmark the permalink.

6 Responses to How to use Finance101 compounding calculator

  1. Pingback: How to use Finance101 CAGR calculator | Rich In The HeartRich In The Heart

  2. Pingback: Set yourself up for early retirement … or whatever | Rich In The Heart

  3. johndoe says:

    nice program, glad it checked out in my antivirus software ok, n glad to see it works well
    would be nice if the total amount was listed in a field on this screen, so I wouldn’t have to scroll.

  4. Pingback: The Finance101 calculator | Rich In The Heart

  5. Pingback: How to use Finance101 amortization calculator | Rich In The Heart

  6. Pingback: How to use Finance101 finance101 calculator | Rich In The Heart

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