Tuesday, 31 March 2015

Am I Saving Enough?

I had published this post a couple of days ago, based on a concept borrowed from the book "The Millionaire Next Door" about your expected networth or corpus at any given age.  The post describes how to calculate your expected networth assuming you save at a certain rate, and your investments and salary grows at a certain rate.  Since that post, I have got several queries from readers for their specific situations that I am doing my best to respond to.  One recurring question is around the annual salary assumption I have made.  Since different people have different salaries when they started, either higher or lower than my assumption in the table calculation, the common question is, how do I calculate my expected corpus for my salary situation.  
Actually this is very simple to do.  Let me summarize my assumptions and reproduce the table from my earlier post.  I had assumed a starting salary (after taxes) of Rs 3 Lakhs per year, with a 8% annual growth in salary, 20% annual savings rate, and 12% annual growth in corpus.  The starting salary assumption is quite arbitrary, but you can easily apply the same principle to any starting salary. Here is the table reproduced below but with one additional column this time:
The final new column in this table is the ratio of total corpus to salary in the given year. Taking the same example point from the previous post, at the age of 45 years, your total corpus should be 6.9 times your annual take home pay.  Note that this applies for any starting income you choose!  So if your starting take home pay at age 25 was Rs 2 Lakhs per year, then at age 45 you should have amassed 6.9 x Rs 2 Lakhs =  Rs 13.8 Lakhs.  Similarly if your take home annual income at age 30 years was Rs 10 Lakhs per year, then at age 45 your total corpus should be 10 / 4.4 x 96.2 = Rs 2.18 Cr (I simply scaled the corpus at 45 years viz Rs 96.2 Lakhs from the table above, by 10/4.4, since I wanted the answer for Rs 10 Lakhs take home at 30 years, while in the table above the take home at 30 years is Rs 4.4 Lakhs)

So as you can see, it is quite simple to scale up or down your numbers for your particular situation, using the table above, depending on the take home post-tax salary you are earning.  Let me know if there are other cases you want me to consider and I will be happy to post those scenarios as well.


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