That’s not me talking. That’s an infamous quote from a Barbie doll that was offered for sale to the public years ago. Understandably, that line did not go over well with a lot of people. We can all be glad that such toys aren’t offered for sale these days, and being a parent with a daughter who excels in math, you can certainly count me in that group!
Hopefully nobody out there is taking a page out of that playbook, and thinking that “personal finance math is tough!” If they are, they should stop. It’s not tough.
Yeah, there’s no doubt that math can play a huge role in finance. This can even extend to personal finance, and it can actually be quite easy. Big picture, it’s really matter of making more money than you spend, and taking the savings and investing it wisely to build up net worth.
As I think about it, there are actually 3 numbers we can focus on to help us go a long way toward financial success. Here they are, 3 financial numbers that can help us build wealth:
Number of Years of Saving Money
Most of us have probably seen those examples of how much better off a person can be by starting to save for retirement when really young, compared to waiting a decade. It can be quite startling.
Let’s say Joe saves $10,000 one year, and then holds it until retirement 20 years later. Let’s also assume he invests it and earns 8% per year, and this amount compounds over time. Joe would see his initial investment grow to nearly $47,000 (not inflation-adjusted) by retirement.
Now, let’s suppose his much younger sister Jane saves $10,000 that same year, and holds it until her retirement 30 years later. All else equal, this amount will grow to over $100,000 by retirement.
So, the time to retirement was just 50% more, but the resulting dollar total was over 100% more. Clearly, time has value!
Keeping it simple, the more years we have to save and invest, the more financially successful we’ll be.
Rate of Return on Investments
Going back to Jane, suppose she earned 10% on that $10,000 compounded over 30 years, instead of 8% as illustrated in the example above. In this case, it would result in an amount of nearly $175,000 by retirement with the increased rate of return.
A 25% increase in the percentage points of return (8% to 10%) yields a nearly 75% increase in overall dollar total during the same time period. Obviously, rate of return makes a big difference!
Keeping it simple, the higher our percentage rate of return on investments, the more financially successful we’ll be.
Percent of Income Saved
Let’s revisit our friend Jane again. Let’s now suppose that she saved more than $10,000 that year which happened to be 20% of her $50,000 income. Instead, let’s assume she saved 24% of her income – which would be $12,000. Over the same 30 year period, that investment would grow to over $120,000.
Basically, that incremental $2,000 in that one year resulted in about $20,000 more at the end of that time period. Seems like a pretty good return!
Keeping it simple, the higher the percent of income we save, the more financially successful we’ll be.
Bottom line: sure there are many numbers and metrics we could analyze regarding money, but if we focus on simply increasing these 3 basic numbers, we’ll be going a long way toward putting ourselves in a position to succeed!
My Questions for You
What do you think about these 3 numbers as levers we could pull to grow our net worth?
Which of these are you focusing on to improve your financial picture?
Any other suggestions on simple numbers or metrics we can focus on?