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Saving that Raise
Note: You can use any financial calculator to do this problem, but if you want the BEST, you can
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THE SCENARIO
It's the start of the year, and many companies choose that time to give raises to their employees. If your company gives raises at a different time of year, feel free to bookmark this post and refer to it later on.
Let's say Jack got a raise of a dollar an hour - $160 per month. He's sorely tempted to get spinning rims for his car (followed by a new car to go with his spinning rims), but instead he decides to sock that money away for a future down payment on a house.
If Jack earns 10% on his money, and he invests all of this year's raise, how much will he have after 5 years? Assume that Jack keeps 60% of his income after taxes.
THE SOLUTION
Jack's raise is $160 per month, but he only keeps 60% of it. Therefore, Jack can invest $160 x 60% = $96 per month.
First things first, make sure the calculator is using 12 Payments per Year.
N: 60 (I want to know how much Jack will have after 5 years)
I/YR: 10 (Jack's investing his money at a 10% return)
PV: 0
PMT: -96 (Jack's investing $96 per month)
FV: (This is what I'm trying to find)
After investing his raise for 5 years, Jack will have accumulated $7,433.96.
$7,434 might not be enough for a down payment on a house where Jack lives, but keep in mind that there's no rule saying you can't buy property somewhere else. Also, if Jack invests next year's raise, and the one following that, and so on, he'll actually be able to put together quite a bit more than $7,433 over the course of those 5 years. What do you think? Is saving a raise something you think you could do?
If you couldn't save your raise, could you save half of it? Let us know what you think in the comments!
