The secret to personal finance is spending less than you make. Examine your own
ID: 2739440 • Letter: T
Question
The secret to personal finance is spending less than you make. Examine your own purchases during this week and report how making one change in your purchasing behavior would effect your lifetime financial wealth accumulation. For example, not buying the latte at Starbucks every workday, using tap water rather than soft drinks, not going out to dinner once a week, etc...
Step One: Take the amount of the savings due to your buying habit changes.
Step Two: Multiply the amount in Step One by the number of times you will save that amount over a year to determine your annual savings.
Step Three: Use the future value of annuity assuming 50 years and 15% to determine how much this minor change will affect your future wealth. (See the Eliminating An Expense Calculator in the Worksheets and Calculators page)
Explanation / Answer
Step 1: Determined the Amount Saved Due to Change in Buying Habits
Let us assume that I order a meal (from outside) worth $5 three times in a week, resulting in a weekly outflow of $15. I checked the cost of preparing the same food and observed that I could save $3 per meal if I prepare the food myself. However, because of the limited time available with me, I can prepare the meal only once in a week. Therefore, I decided to order the meal 2 times and prepare it once in a week. By doing this, I was able to save $3 per week and $12 in a month.
_________
Step 2: Calculate Total Annual Savings
As we are able to save $12 in a month, we will be able to save $144 (12*12) on an annual basis.
_________
Step 3: Calculate Future Value of Annuity
The future value of annuity can be calculated with the use of following formula:
Future Value of Annuity = Annual Savings*[((1+Rate)^1 - 1)/Rate]
Using the values calcuated above and information provided in the question in the above formula, we get,
Future Value of Annuity = 144*[((1+15%)^50 - 1)/15%)] = $1,039,351.14
Therefore, my future wealth will increase by $1,039,351.14 if I save $144 on annual basis.