My point would be that you actually need to track your expenses (on a spreadsheet, an app or even a little dog-eared notepad) but the important thing is you actually need to do it so you know what your real expenses are, not just what you think they ought to be! Just like dieting where it’s easy to ‘forget’ to write down the doughnut you had with your morning coffee, it’s the same with expenditure where it’s easy to ‘forget’ to write down the little weekend away or weekly takeaway (using the justification that it’s not part of your normal expenses). There are numerous blogs and websites out there which talk about frugal living, how to save money and how to cut back on your expenditure so I won’t repeat a lot of that here. Secondly, you need to look at your expenses. However, the key message is that if you leave you money in a regular savings account (the modern day equivalent of the mattress), then it’s likely to derail the “25 times you annual expenses” argument. Whether you can achieve the 8% growth on average (because remember that investments tend to be long-term and sometimes volatile) may be a different question and again one which we will touch on in a future post. Of course you won’t find any savings accounts paying 8% at the moment which means you are going to need a portfolio of investments which might give you both income (perhaps in the form of dividends and interest) and investment growth.Īlthough the investment world may seem incredibly complex (and by the way it certainly can be!), today it’s possible to build a diversified portfolio with just one or two well-chosen investments. ![]() The math is not too complicated (and the calculator does it all for you anyway) but let’s start with some of those assumptions.įirstly, the model assumes an annual inflation adjusted investment return of 5% which, if inflation is at 3%, means you need to achieve 8%. But if your annual take home pay is 30,000 and your expenses are 15,000 then great, you’re on track to retire in 16 years. Ok? Simple! ….and a little scary, because if you put in annual take home pay of 20,000 and annual expenses of 19,500 then it looks like around 85 years to reach retirement (which by the way corresponds to current savings rate in the UK). The calculator will then work out based on your current savings rate when you can retire. ![]() We’ll talk about a couple of the complexities of this model but the basics are very straightforward. So let’s dig a little deeper into the math (and for those who want to play along you may want to use this nifty calculator. Trust me, three years at university studying economics, only to emerge to the world with no real skills teaches you this.īut as the saying goes, anything that’s worth having is worth working for so it at least merits investing a little bit of time to understand the principles. The problem with mathematical theories of course is that they rarely, if ever, have a real world application. I imagine that the vast majority of people switched off at that point as a report by Aegon indicated that the average 55 year old (never mind 40 year old) has around 50,000 in pension savings and 2 in 5 households have no savings at all. ![]() That’s a scary statement as it went on to say that if your annual expenses are 25,000 then you need 625,000 to retire. Retirement is no different and specifically the math that was quoted in the program was that “in order to retire early you need to save 25 times your annual expenses”. Intellectually we have designed mathematical theories which cover the decision-making process, the impact on demand of changing prices or even how long we will live (if you believe the actuarial tables). It is probably one of the things that defines us as a species, you never hear anyone say “this is too easy we need to make it more complex”. ![]() Inspired to write the post by the (incredibly shallow) program on channel 4 on Monday 10 July.
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