How Much Should I Save to Reach My Goal?

1.         Explain that many financial firms provide online resource for savers and investors.  One common resource is a “savings calculator.”  Clients or the public can use the calculator to determine how much they must save over some period of time t reach a specific savings goal.

2.         Explain that to reach a specific goal, such as $1,000,000 dollars saved at the time of your retirement, is determined by several factors:

a.         Current savings balance (how much you have now).

b.         Your future amount desired (your goal)

c.         The number of years you have to save.

d.         How much you can increase the amount saved each year.

e.         Expected annual return.

f.          Your marginal income tax rate.

These factors are explained on the NASDAQ web page.

3.         Go to: http://www.nasdaq.com/calculators/goal-savings-calculator.aspx

4.         Demonstrate how to use the calculator.  If you have access to a computer lab or  individual computers, students can individually use the calculator.

When you or the students click on the “Submit” button, the calculator will determine the required amount of saving over the time period.

5.         Discuss the three key factors influencing your return

a.         interest rate

b.         time

c.         amount saved (periodically)

Ask:  What is the key to achieving a long-term savings goal?

a.         higher interest rate (return)

b.         begin saving early

c.         save more (periodically)

6.         Introduce the concept of “compounding.”

Compound interest results when interest is added to the principal amount, so that added interest also earns interest. This addition of interest to the principal is called compounding.  If, for example, a balance of $100 earns $1 of interest during the first interest period (1%), it will earn interest on $101 during the next interest period (adding $1.01).  It will earn interest on $102.01 during the next period.  Beginning to save early with compound interest, increases the return over time.

7.         Students can see the impact of compounding by increasing the original amount saved or the time period of saving (saving early) on the savings calculator.

8.         Conclude: Review the three key factors influencing total return.   

a.         higher interest rate (return)

b.         begin saving early

c.         save more (periodically)