Don’t delay your savings! - Calculator Explanation

Subscribing to my site guarantees you don't miss any new content. Choose either E-Mail Feed or RSS Feed. Thanks for visiting!

This calculator shows you what happens if you delay your savings. It works really well if you have some kind of big expenditure on the horizon and need to know how much has to be set aside in advance.

Much like alot of the financial planning tools, this savings calculator takes the murkiness out of your personal financial picture. And as I’ve said many times, if you know what you need to accomplish then it becomes alot easier to a put a plan in place to achieve that goal.

Don’t delay your savings! Calculator

Some people might use a calculator like this to begin saving for a future down payment on a home, maybe to plan for a dream vacation, but for our purposes, I thought it would make sense to put it in the context of planning a Roth IRA conversion. This conversion will create a one time tax bill, with the taxes due in 2011 and 2012, and then the monies grow tax free from that point forward. So lets take a look at an example and define the calculator fields…

Years to wait

The number of years you might wait before you begin saving. The calculator delays your new contributions for that number of years.

For our purposes, you have 5 years, beginning in 2007, to save for the Roth conversion taxes due in 2011.

Starting amount

The starting balance or current amount we have invested or saved. This field is indirectly related to our savings goal (Roth conversion taxes), it shows you the impact of our additional monthly contributions on an existing savings balances. I gave our Jane Doe $3000 in previous savings earmarked for our conversion.

This calculator assumes your current savings is earning your annual rate of return whether you decide to delay your new contributions or not. For example, with our current balance of $3000, if we never make any new contributions, our delayed and non-delayed results will be the same.

Years

The total number of years you are planning to save or invest. In our case, we’re saving for the next 5 years and plan on taking all of our savings to pay for the Roth conversion taxes due in 2011 and 2012. Our monies will grow to $17,447.

Rate of return

The assumed annual rate of return for our savings account. We’ve inputed a 5% rate.

Additional contributions

This is the amount we plan on adding to our savings during each period. The options include monthly, quarterly and annually. This calculator assumes that you make your contributions at the beginning of each period.

Jane Doe will be adding $200 a month into her savings account.

In conclusion

This calculator is excellent for setting savings goals and alerting you to the downside of postponing those savings contributions.

If Jane contributes $200 a month for the next 5 years, growing at 5%, she will have saved $13,618. If we took this amount and added in our $3000 in previous savings (grown at 5% as well) we would end up with $17,447. Btw, if you were to bump up the additional monthly contributions to $300, using all of the above information, you would end up with $24,256 in 5 years time; enough to do a nice sized Roth conversion.

Sticking with that theme, if we use the Roth conversion amount (of $60,000) from my previous post as a target, we would have had the full amount needed to pay the conversion taxes due in 2011 and 2012. And from there it would be smooth tax free sailing…

Tags: 'Down Home' Financial Calculators, financial calculators, Savings Calculators