I wanted to make a simple calculator to show just how valuable each $1 (or pound, euro etc) that you have today is really worth to you over the long term. There’s obviously some major assumptions in such a calculation, but I hope it highlights how important it is to start saving early.

If you’ve read any personal finance blog, book or guide, then you’ll know about the importance of compound interest and starting your financial journey early. Kind of like how water can eventually carve a ravine into a mountain, compound interest, if above the rate of inflation, will inexorably grow your savings or investments.

There have been several babies arriving or on their way in the FI community of late (congrats DivHut, Passive Income Pursuit and Dividend Family Guy) who are in an ideal place to start saving and take advantage of all this time.

## The normal charts

Now most of the time, the typical graph you’ll see in personal finance literature looks something like the following.

This shows the increase in value of $1 that you’re able to invest or save with an 8% growth each year over the next 70 years. 8% is the number usually thrown around as the “average” that the stock market will increase each year. The chart ends in 70 years time, with a value of $219. Which is awesome if you’re a) really young, b) are able to get an 8% annual yield for the next 70 years.

The shape of the graph is the same regardless of the amount; it’s an exponential curve if you’re mathematically inclined. The annual yield changes the slope / rate of increase however but much like Buzz Lightyear, it aims for infinity and beyond.

## Reality bites

The chart above with an 8% growth looks great and everything, but it’s not that realistic sadly. The average stock market return isn’t necessarily 8%, since you’ll likely be investing over say a 30-year period than a 70-year one. And the figures don’t take inflation into account which is a drag on your real return. I’m not mentioning taxes either.

But for the purpose of doing a calculation, you can use the following formula:

**Real Rate of Growth = Average Growth of Investments – Average Inflation Rate**

Inflation has lately been around 2% a year. This means that if you expect to get 8% each year from your $1 investment then your real growth is only 8%-2% = 6%, since although your money is growing 8% each year, the price of everything around you is increasing by 2% so your money is worth 2% less each year.

## Turning it around

Now it’s probably my cold medicine talking, but I wanted to look at this a little differently. Rather than focus on what my $1 would be worth in 70 years time, I wanted a way to show “how much is this $1 worth to me at my age”.

For someone who is 70-years old today, his $1 is not worth as much as someone who is only 20 years old today. Her $1 is worth much more than the older person’s $1 because she could invest or save that money over a 50-year period. As you get older, the value of your $1 becomes lower and lower because you have less time for it to grow. This is why you should start investing as early as possible because you have more time, the most valuable currency around.

## How much is a dollar worth to you?

So here’s a calculator that shows the value of $1 against your age – the upper age limit is fixed at 70. It’s set to 2% inflation and a lower 5% investment yield by default, but you can change that by typing numbers into the blue boxes.

For me each $1 is worth about $2, so a $10 meal really costs me $20, yet the same meal costs someone who’s 20 years old about $40. It’s certainly something to think about the next time you buy something you don’t really need.

You can also use the calculator to show the damaging effect of leaving cash in a low-interest savings account. While it’s a great thing to have an emergency fund, if it’s earning lower interest in a bank than the current inflation rate, then it’s losing value. If inflation is 2% and you’re only earning 0.2%, then using the formula above, the account is really decreasing by 1.8% each year. In the US it’s easy to get an online savings account of about 1% but even that is below inflation.

So hopefully you’ve picked up a couple of things from this post:

- You can never start saving soon enough.
- Think about the loss of future value when spending money.
- Investing really needs to be considered as part of your savings strategy.

## Quote of the day

Everyday is a bank account, and time is our currency. No one is rich, no one is poor, weâ€™ve got 24 hours each.

Thank you for the DivHut mention. Much appreciated. Baby DivHut will start his investing career within the next few weeks. Talk about time… We are looking to fill hist account with dividend growth stocks for the next two decades or more if he likes.

Hi DivHut,

Glad to hear that Baby DivHut is doing well and ready to start buying & holding! I’m interested to see if you’ll follow any different selection criteria for him, e.g. favoring higher growth dividends etc.

Best wishes,

-DL

We haven’t gotten around to investing for Luke yet but we’ll get started some time this year. Talk about a huge investing time horizon to let compound interest do it’s thing.

Hi JC,

The early bird definitely catches the worm in this case! Looking forward to watching Luke’s portfolio grow along with him.

Best wishes,

-DL

Wow, when you put it on the graph, it does give some new perspective. ðŸ˜› $1 back in the day, I could party on that amount!! Really, my Dad income was $5/week!!

Hi Vivianne,

Inflation certainly has a big impact over time – even a “millionaire” today isn’t really the same as a millionaire from 20 years ago. When people say there are so many more millionaires today it’s a function of inflation as well as wealth since it becomes easier to reach millionaire status each year.

$5 a week? Wow! To think that the minimum wage is now $7.25 an hour ($290 a week) and likely to increase further.

Best wishes,

-DL

Excellent post!

It is a really interesting idea to turn the concept on its head. I am around $3.50. It is a neat way of imagining the “real” long-term cost of your short term purchases.

Fascinating. Thanks for putting it together.

Hi DD,

You can change the two numbers in the graph and the chart will update; I went with fairly conservative numbers, but if you expect a high yield then the dollar cost can change dramatically.

It certainly highlights the important of saving money early in life and the effect of time.

Best wishes,

-DL

Yes, I noticed that. The Excel embedder seems very good. Much easier than my experience with Google Docs trying to embed such a “dynamic” chart (you may remember from my post on Work Freedom Day!).

I think that planning conservatively is always a good plan. I’d like to think that long term I could almost reach a 5% growth from the dividend income alone (setting aside capital gains). A bit ambitious at the moment maybe, but you never know!

It really does highlight how important saving early is. It will join my “conversion” articles list I am putting together.

Excellent article. Loved the way things look when turned around. Looks like I am somewhere around $2.8-ish.

Thanks for sharing

R2R

Hi R2R,

Thanks – I’m glad you found the article interesting. With the default values I put in the graph, the average rate is 3% after inflation which means the amount halves every 24 years.

Best wishes,

-DL

I like that! It puts numbers under new perspective and highlight yet again the importance of compounding effect! ðŸ˜‰ According to your graph, a dollar is worth somewhere around $2.7. Worth thinking about it on a spending habit as well.

Cheers!

Mike

Hi Mike,

Yes that’s one of the things I wanted to convey – a $3 coffee today is maybe costing you $9, much more if you’re younger. So it can be worth trying to find a cheaper alternative and saving the difference.

Best wishes,

-DL

Nice post. The graphs and the numbers nicely conveys about compounding and inflation. I am running out of time ðŸ™‚ Need to save more and invest more.

Hi DGJ,

It certainly puts things into perspective. It’s a little ironic that money is worth the most when you’re young and have less to spare.

Best wishes,

-DL

Yeah always a good question. What to do with your cash in the emergency fund. Mine is slowly building up again but leaving that dollar sit there will not earn my anything.

Hi DFG,

Yes cash value is always decreasing and even once established, you have to keep topping the emergency fund up if you want to maintain its buying power. So it’s also a small drain on your income too if you do that.

Best wishes,

-DL