Wednesday, September 11, 2013

Mystery of the Missing Month of Savings

If you save $1000 per month and earn no interest, you’ll have $12,000 at the end of one year. What if this goes on for two years? You might naively think you’d have $24,000 saved, but an authoritative source says this isn’t right.

According to the Globe and Mail’s Pay Yourself First calculator, you’d only have $23,000 saved after two years of saving $1000 per month.  (As of 2016 Nov. 2, the Globe and Mail finally dropped this calculator from its web site, but you can still find it here.) To see this, punch in an annual salary of $100,000 with 0% for the salary increases and 0% rate of return, and set the “pay yourself” rate at 12%, with one year of saving. The result is a retirement fund of $12,000 as you would expect. Now bump it up to 2 years of saving. The retirement fund jumps to $23,000.

I’m not sure where the missing month goes, but apparently every year after your first year of saving you lose a month. After 3 years of saving you have $34,000, and after 10 years you have $111,000.

I first wrote about these surprising results almost 7 months ago. I received a message from the Globe and Mail saying “Thanks for drawing the problem to our attention. We are investigating.”  However, the calculator remained online for a long time.

6 comments:

  1. And I thought I could trust G&M. Some leading financial newspaper :(

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    1. I suspect that the scramble to get a working business model for online content is all-consuming.

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  2. I've found some other online calculators that are off, although I can't recall them off the top. Too bad they haven't fixed it yet.

    The G&M should have the same thing for a mortgage calculator, I would enjoying missing a payment :)

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    1. @Mark: Back when I had a mortgage my bank used to announce with great fanfare that I'd earned the right to skip a payment (with fine print saying I'd still owe the money and would be charged more interest). I'm guessing this isn't what you had in mind :-)

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  3. I betcha they're measuring something at the beginning of each month or the end of each month - something simple like that.

    Years ago when I was developing and testing a mortgage calculator for my website I was testing it against the banks' website. I found one of the big 5 banks using American numbers in it's calculations. When I notified them (and provided the fix), they suggested that I visit a branch if I wanted a mortgage amortization schedule.

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    1. @Glenn: You might have the explanation. But they seem to make the same mistake for every year which compounds the problem greatly.

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