Wealth Accumulation – Keep Some Of What You’ve Earned

Wealth Accumulation is just what is says, saving enough money to meet a specific goal or goals.  Note that there should be definite goals. For instance, if your goal is saving to buy a house, you will want to set a time for when you want this house.  You will want to plan how much you need to put down – preferably 20% to avoid the added expense of mortgage insurance. You will want to know how much of a monthly mortgage payment you can afford, not forgetting that taxes and insurance will be added into the monthly payment and that the taxes and insurance may increase every year.

When you have these numbers then you need to look at how long you want the mortgage to run.  The shorter the length of time, the sooner the house will be paid for, but the monthly payments will be higher.  Don’t forget that even when the mortgage is paid, you still will be paying for property taxes and insurance, and that these costs will most likely increase every year.

What other goals might you consider?  Well, college for the kids; a new car, a boat, a vacation, or maybe just a “nest-egg” to supplement your retirement.

College for the kids would be the next biggest expense, and at the rate costs are increasing, it could be more than your home.  What you will need to consider:  how long before your child (children) start school; how expensive is the school today then increase that by 7% a year.  Add in an estimate for the other charges and books, and room and board.

How to make all these calculations without help?  Glad you asked.  One of the great purchases you can make, that will pay for itself many times over, is a financial calculator.  A financial calculator will show the Time Value of Money and can compute loan payments, interest rates and length of time to pay off a loan.  One financial calculator I can recommend is the Texas Instruments BA II at a cost of $30 – $35.  They offer a more expensive model, but this is all you will need.  If you decide to shop for a financial calculator make sure it has these five keys:

N which is the number of periods, usually months.

 i which is interest for the time period (months or years).

PV which is the present value of the loan, or investment.

PMT which is the monthly payment to pay the loan, or accumulate wealth.

FV which is future value.  For a loan that number would be zero.

For example. You are purchasing a new car and are financing $24,000 at an interest rate of 6% annually. You want to decide whether to pay it over four, five or six years. Do these calculations.

N = 48 (4 years), 60 (5 years) or 72 (6 years)

I = 6%/12 = 0.5% per month

PV = $24,000

FV = 0 (the loan is paid off)

Compute PMT: For 4 years monthly payments are $560 per month. 5 years is $462 per month and six years is $396 per month..

If you are investing, for example how much money  will you have in 20 years if you invest $200 a month at 10% annually.

N = 240 (20 years x 12 months)

I = 0.833 (6%/12 months = 0.833 month)

PV =$ 0 (you are starting now)

PMT = $200 per month

Compute FV = $153,140 which is how much wealth you will have accumulated in 20 years.

That is just a sample of what a financial calculator can do for you. Be sure to completely understand the instructions and do all time value of money exercises.