Wednesday, February 14, 2007

Some Realism

One of the best features of being a finance guy is knowing how to run some basic Excel functions and obtain some interesting information from them. For instance, after I set my goal, I ran a "this is real life" test on my goal.

To begin, I have a fairly high base salary for someone of my work experience (zero years, zero months), so I have a slight edge (with the same assumptions, someone making half as much can reach the goal 4 years later). But working with that, I added a few more variables into the mix. I considered that I would save 10% of my base salary, pre-tax, and 50% of my bonus annually. This savings would go into a stock market account with an average return of 10%, which is about the norm.

Next, I considered that bonuses would average about 10% of my base salary. My base salary would be augmented annually at about 3.5%, and every three years, instead of a inflationary increase, I would receive a promotion, adding 12.5% more to my salary.

After all these considerations, my realistic liquid assets would only be $187,317.65, of which $119,289.45 is savings, and the rest market returns after 8 years. So clearly, I would only be 18.73% of the way to my $1 million goal by age 30.

For fun, I allowed some adjustments for different variables to see what would allow me to obtain the $1 million value. Two outrageous methods are either to save 78% of my base salary or hope for average market returns of 49%.

It is going to be a tough road ahead.

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