The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: MadisonStreet on May 10, 2013, 09:34:32 AM

Smack me with a fish is this is obvious to everyone but me, but how do you arrive at the 752 and 173 expense compounded over 10 years figures?

It's the future value of $1 per month (or per week) invested at 7% interest for 10 years. In Excel the formula is:
=FV(rate, number of periods, payment, present value)
Or, in the case of a monthly expense, the following will equal 173:
=FV(7%/12, 120, 1, 0)
Hope this helps.

That does make sense, thank you! But it raises another question, which is...how accurate is the 7%? I read in one of this postings (I'm trying to get through them and up to speed as fast as I can), that it was a median between 5 and 10. Is this truly a good average to work with?

That is a much more complicated question than the one you originally posed! ;)
There is a large, and essentially unresolvable debate, over what is a reasonable estimate of future returns. Stocks go up and down. Inflation goes up and down (eroding real returns and boosting nominal ones). It is my opinion that over the longterm, 7 or 8 percent is a reasonable return estimate of future returns if you are invested in a largely equity portfolio, and I can cite all sorts of data to support that. Others would disagree, and would be able to cite equally valid data.

752 and 173 are not magical constants like pi and e, they're estimates. Use them as a ballpark indicator of just how much money you save from turning down the thermostat, not for planning your FI stash size.

And remember inflation, too. When I project, I assume 7% average annual portfolio growth eroded by 3% annual inflation.

Great point about inflation. In the short term equities are just about the only place to find 7% returns (the stock market is in all out bull mode this year), but of course equities are also one of the most volatile of investments.
Having said that, these rock bottom interest rates won't be with us forever. In the early 80s it was very easy to get returns of well over 10% outside of equities. At some point a CD with a reasonable return will come back to the marketplace.
I think 7% is a fair estimate overall. As long as one is fully aware of the up and down nature of investing and are willing to assume some risk (and invest for the long term).