For this scenario we assume you’re earning $5,000 per month from your job and that it is increasing by 3% per year from inflation.
I am going to take some time to go over how I model and calculate this since it is largely the same for subsequent scenarios in How to Acquire a Multi-Million Dollar Investment Portfolio While Earning Just $5,000 Per Month.
So, here’s a chart showing the Gross Paycheck you receive each month for the first year.
Here are a few things to note. First, you will notice that I assumed we started this (and all scenarios) on January 1, 2018. That means the first year is actually January 2018 through December 2018.
Second, you will notice that your Paycheck in January 2018 was for $5,000 and February 2018 was for $5,000 as well. I can hear you saying, “James you have an error in the very first chart you shared with me.” Again, please put down the pitchforks and let me explain. For the Nomad Calculator 3, I assume that inflation happens in the future. That means that we start adjusting for inflation with any months beyond our current month. I see your pitchforks lowering… that’s good. So, I am writing this in February, 2018. That means that we will start adjusting for inflation in March and beyond. Which, it shows correctly. Whew! Narrowly escaped that with my life.
The third thing regarding this chart showing your Paycheck for the first year. Do you think I believe your boss is really going to be giving you “cost of living”, inflation raises every month? I’ve been self-employed for a long time, but even I am not that naive. I could have written the Nomad Calculator to only give you a raise every year to adjust for inflation (sort of like what I do with rents that adjust with each new tenant/lease renewal on the real estate related stuff) but I opted to do it monthly even though I do realize that is not a perfect representation of reality. I hope you’re OK with that.
So, I showed the Gross Paycheck you’re receiving for the first year. This is what it looks like for the entire 40 year, 480 month, period that I am modeling for you.
So, a couple things about this chart. If you look at your Paycheck 40 years in the future, you are earning $16,230.33 per month gross. Yes… that’s right, but before you get too excited realize that a cheeseburger on the dollar menu at McDonDon’s will cost you over $3.
Here’s a chart showing you what $1 is worth at any point in the future.
If your palms are starting to get sweaty because you think I’m going to have you do the math to convert future dollars to the equivalent value in today’s dollars, wipe them on your pants and take a deep breath because I am not going to ask you to do that math. Instead, the Nomad Calculator 3 will automatically do the math for us. Here’s a chart showing you the “inflation adjusted” Gross Paycheck you earn. In other words, what the Gross Paycheck you receive in the future would be worth in today’s dollars if we did not have inflation.
Yes, I did show you a chart that with a completely flat line at $5,000. You are consistently earning $5,000 per month, every month when you think about it in terms of inflation adjusted dollars.
Unless I tell you otherwise, I will be talking in terms of raw dollars and not adjusting for inflation.
Effective Income Taxes on Gross Paycheck
Back to our story… you’re earning $5,000 per month and that’s increasing with inflation. But, you have to pay taxes on that.
In our model, we assume you’re paying an Effective Income Tax on your $5,000 per month of 17.9%. That means on a $5,000 Gross Paycheck, you’re really taking home about $895 less because of taxes. Of course, as your Gross Paycheck increases from inflation, the amount you pay in taxes goes up as well. Nomad Calculator 3 takes care of all that for us. This chart shows your net income after taxes from your Paycheck for the first 12 months.
If we’re modeling income, we need to model expenses. And, we do. We’re setting our expenses such that we are saving $160 per month. Why? Because that’s what we’re trying to model: saving $160 per month. Here’s a chart showing our expenses.
Since we are not homeowners and we are renting in this particular scenario, the expenses includes the rent we pay to a landlord. At least someone’s getting rich in this scenario… I’m talking about your landlord.
Just like your paycheck increases at 3% per year with inflation, so do your expenses… we’re assuming your personal expenses are also going up at 3% per year.
This scenario is about you renting and saving $160 per month from your paycheck. We consider your savings to be the difference between your paycheck after taxes and your personal expenses. This is a chart showing the first 12 months of your savings.
As you can see, the amount you are saving is increasing slowly because your income is going up at a rate of 3% per year from inflation (then you’re paying taxes on it) and your expenses are going up at a rate of 3% per year from inflation. The difference between the two of them is getting a little wider each month. You’re saving all of it and in this scenario, we are assuming you don’t believe in the efficacy of the stock market or real estate and so you put the money in a checking account or under your mattress. It does not matter which… we assume both are earning you 0% return.
We also assume that everyone starts with $5,000 in savings. Maybe you saved your tax refund check, maybe you got a graduation gift after college, maybe you sold your blood or plasma… whatever story you have… I assume that in each one of these scenarios, you started with a job that earns $5,000 per month and $5,000 in an account.
So, when you look at your Checking Account balance for the first year, it started with $5,000 and the $160 you saved. Then, each month you add your savings (shown above) to your checking account. The following chart shows you the checking account balance for the first year.
By the end of the first year, you have $6,941.86 in your checking account.
That’s worth $6,772.95 in inflation adjusted dollars as shown in the chart below.
Your Net Worth
Fast forward 40 years of saving every month and putting that money in a checking account that earns nothing and you end up with $151,390.01. I’ve shown that in a chart below.
If we adjust for inflation, that means you’ve managed to save the equivalent of $46,638.84 in today’s dollars. That’s shown in the inflation-adjusted chart of your account balance below.
Kind of boring so far, right? Yes, I agree… but I am showing you this as a baseline to compare to other—far more exciting—scenarios. Let’s look at the next scenario where you save the same $160, but you do believe in the magic of the stock market and invest your money in stocks that earn you 8% per year. What difference does that make? Let’s check it out together.
- How to Acquire a Multi-Million Dollar Investment Portfolio While Earning Just $5,000 Per Month
- Renter Saves $160/mo in Stocks but No Real Estate
- Nothing Down Homeowner Saves $160/mo in Stocks but No Rental Real Estate
- 1% Down Homeowner Saves $160/mo in Stocks but No Rental Real Estate
- 0% Down Homeowner Saves $160/mo in Stocks and a Single 20% Down Payment Rental