Fuzzy Math Recovery (winners announced!)

By MP Dunleavey on Thursday January 28, 2010
This post is about credit, planning, saving


dw_savings2Many thanks to all those who participated in last week's pop quiz!

Congratulations to Sophia and Kristina, our two winners!

Although several other readers came close—Stephanie, Amanda, Kateh, Jordana, Debi, Beth, Di, Jamie—we regret to report that fuzzy math derailed almost everyone.We take credit for some of the confusion, as two of the questions could be answered in different ways.

Luckily, this presents a fabulous "teaching moment," as the moms say.

  1. There are two ways to answer question 1:
    1. If you made only the minimum payment of 2.5% on a $10,000 balance at 19.99% interest, it would take 403 months—or about 33.5 years to pay it off. Use this minimum payment calculator on bankrate.com.

    2. BUT, if you read the question literally, and assumed a fixed monthly payment of $250, it would take 67 months, or about 5.5 years to pay it down.


    2. What's the diff? The minimum payment is $250 (2.5% of $10,000)—but only at the start. It gets lower as you go: 2.5% of $9916 is only $247, etc. That why paying only the minimum turns into a 33-year jail sentence.

  2. Adding an additional payment each year would shave about 5 years, 8 months off your mortgage, assuming it was a 30-year fixed loan for $160,000 @ 6.5%. Answers varied for those who used other terms. Use this mortgage calculator on bankrate.com.

  3. Most people did the basic math correctly on this one ($50,000 is indeed 4% of $1.25 million), but then forgot to factor in inflation.

    4. Assuming a 3% yearly rate of inflation, a $50,000 income would translate about $121,500. Thus, the total amount you'd need to save would be in the $2-3 million range—Sophia and Kristina came closest to getting this right. Use this retirement savings calculator on bankrate.com.
Comments (14)add
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written by bb , January 28, 2010
So my question is, how much would a 35-year-old need to save every month to have $2-3 million in the bank by age 65?
I'm not sure if I used the bankrate calculator correctly, but I think it's saying you'd need to be saving $1600/month.
That doesn't sound possible for someone with a $50K income, whose take home would be around $2700/month, right?
Help! This is why this stuff makes me want to bury my head in the sand...
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written by Kristina Moffitt , January 28, 2010
If you saved $1000 a month for 30 years (begining with nothing right now) with an investment rate of return of 8% (below market average)and assumed an inflation rate of 3% you would have just shy of $1,490,358. Wait three additional years (when the current 35 year olds can begin collecting social security at 68) and it grows to $1,877,42.

Move that to $1100 a month and it grows to $1,639,307 in 30 years. Wait three years more (age 68) and it is $2,065,055.

Yep you read that right. $1100 a month invested at 8% for 33 years and it grows to over two million. Ah the power of compound interest and investing.

I have a great little excel spread sheet calculation thang I would be happy to share that allows people to play with their retirement figures as current values and future values.


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written by kateh , January 29, 2010
Fuzzy math indeed on the third question! You probably need to provide your assumptions when asking a question (i.e. 3% inflation).
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written by Amanda Steinberg (DailyWorth founder) , January 29, 2010
Thanks Kateh, you're absolutely right. We'll be much clearer next time.
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written by MP Dunleavey , January 29, 2010
The thing to bear in mind--and we're going to address this in an upcoming DW--is that although those retirement numbers can look scary, they aren't. Start now, save what you can--and you'll be in MUCH better shape than if you bury your head. Plus, what you earn now isn't what you're always going to earn. That's why you read...DailyWorth!
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written by MP Dunleavey , January 29, 2010
Kateh--I apologize for the oversight! And yet...don't you think it's interesting that so many women didn't even consider inflation? Part of what's happening here, I think, is that money requires you to think in new ways.
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written by sj , January 29, 2010
What "safe" investments would give you 8%/year?
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written by Amanda Steinberg (DailyWorth founder) , January 29, 2010
MP, in defense of our readers, especially those with debt -- I think saving $1,100 a month is scary or at least seemingly impossible.
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written by CARRIE , January 29, 2010
I think you need to craft your questions better. In #3 you stated they wished to still receive 50k in income. Not live a present day 50k lifestyle. There's a big difference when you are planning for retirement since 50 k today equals approx. 20k 30 years from now. But, hopefully one could live off on 20k then because ones cars, houses, student loans and kids wouldn't be part of the finacial equation at that time. Unfortunetly your answer makes retirement seem impossible to many.
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written by bb , January 29, 2010
Thanks for the explanation but I agree, $1100 a month is scary -- if not impossible -- for someone with a takehome of $2700 a month.
I know baby steps are the answer, but seriously, this topic makes me feel like it's literally impossible for a 35-year-old to save a large enough percentage of her income to ever retire with the specs you suggest.
I know ideally most of us will have other sources to rely on, but it's still wack! Is it even possible to MEET the suggested formula? Almost no one can afford to save such a large percentage of their income!
Scary! Makes me want to go out and charge a whole new wardrobe! JUST KIDDING.
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written by NC , January 29, 2010
I agree $1,100 seems a little scary. I just calculated our dual income savings and it is $1,194 (401K). I feel 401K contribution poor every paycheck. We save some after tax money also to supplement this. We got in the habit/lifestyle of saving this much (which isn't enough!!) so it doesn't hurt so bad. Making the necessary increase will sting.
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written by Petunia , January 29, 2010
I think it is really important to get started saving/investing as soon as you can, and contribute as much as you can. Start small and gradually increase if necessary. Also, it is important to observe a few basic rules:

1. Watch your costs. Annual expense ratios compound against you.
2. Choose a sensible asset allocation.
3. Choose broad market index funds whenever possible.
4. Re-balance annually, or as needed.
5. Tune out the "noise". Ignore daily market commentaries, don't read articles titled "10 Hot Investments You Need Now!!". Chasing what is hot tends to lead to sub-par returns. Instead, just keep practicing rules 1-4.

Investing successfully for your future isn't nearly as complicated as it seems at first. In fact, a simple plan is often the best one for us small investor types.


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written by CARRIE , January 29, 2010
When trying to save for retirment I found that increasing my 401 by 1/2 of whatever my annual cost of living for the last 7 years has gotten me to saving 10% of my 401k and I didn't ever miss it because I never saw it to begin with. I know with companies cutting back a 3% raise isn't occuring as often as it did but even an extra 1/2% really adds up over the years.
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written by Neil Hampshire , February 16, 2010
Hi BB, I know a security guard who is saving $1600/month. Actually, its $750.00 every two weeks off his paycheque, when he has no overtime, and more when he does. You can save $1600 on a 2700/month paycheque. Look at those Starbucks barristas who take home less than 1100/month how are they making it? You need to trim the fat out of your lifestyle, and you can do it. If Pumar Inderjit Singh can do it immigrating from Uttara Pradesh India, you can do it with your fatter paycheque than he.
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