Let's figure out how compound interest works - a simple mechanism that will provide you with tangible income in the future. The average pension in Russia - 13 300 rubles. The average pension in Russia in 2018-2019 per month. This is barely enough even for food and medicine.
Perhaps in 30-40 years, the state will start paying good pensions. Perhaps the children will take care of you. Perhaps communism will suddenly come to the country, and no one will need anything. Anything is possible, but with such hopes, you only relieve yourself of responsibility for your future and shift it onto someone else with such hopes.
Instead, you can take simple steps now to help you live your life in retirement. And compound interest will help in this.
Read also: 10 Ways to Save Money on Supermarket Shopping.
What is compound interest?
Let's imagine Andrey. Andrey is 30 years old. He saved a million rubles and put it on a bank deposit at 7% per annum. A year later, his contribution is the initial million and 70,000 rubles of interest. A year later, Andrei again receives his 7% per annum, only now they are credited not for 1,000,000 rubles but 1,070,000 rubles. In the second year, he already earned 74,900, not 70,000 rubles.
Andrey launched a compound interest mechanism: the bank charges interest on money received from interest.
In 35 years, Andrei will turn 65, and he will retire. By this time, his contribution will be almost 10 million rubles. Each year, these 10 million will give an additional 7% - this is 698,000 rubles a year or 58,000 rubles a month.
10 years after opening a deposit with Andrey 1,838,459 rubles of capital + passive income 10,724 rubles / month. In 20 years - 3 616 528 rubles of capital + 21 096 rubles / month. After 35 years - 9,978,114 rubles of capital + 58,206 rubles / month.
Please note: Andrey just put money on the deposit and did nothing else. And if he additionally contributed 9,000 rubles a month to his account, then he would have almost 26 million capital and 140,000 rubles of passive income per month to his pension.
You can get started with far less than a million. If Andrey had started saving 12,000 rubles a month from scratch at the same 7% per annum, in 35 years, he would have had 20 million rubles of capital and 109,000 rubles of passive income.
How to calculate your future passive income
We have prepared a table that will calculate passive income with your parameters. Enter the amount you plan to save, start-up capital, contribution percentage, and age - get the amount of capital for pension and monthly passive income. To enter your values into the table, copy it to your Google Drive.
What questions may arise
What about inflation?
Inflation will certainly affect your savings. 100,000 rubles a month today and 35 years later - different money. But this is no reason not to postpone because even after 135 years, 100,000 rubles a month is more than nothing.
Inflation can be overtaken. You don't have to put money on a 7% deposit. You can dive deeper into the topic of investments - buy safe stocks, government bonds - and go out, say, at 12% per annum. It is more difficult than just leaving money in the bank, but it does not require extra effort.
No one bothers today to save 10,000 rubles a month, in 10 years - 15,000 rubles, and 20 years - 25,000 rubles. Indeed, with inflation, your income also grows, and over time you will become a more valuable specialist, and your salary will be higher.
What if the bank closes?
When the bank closes, the state will reimburse depositors up to 1,400,000 rubles. You will accumulate a much larger amount at a certain moment - it will be a shame to lose it. It makes sense to scatter capital in different places: store 1,400,000 rubles each in several banks. This way, you minimize the risk of losing money.
You can also store capital in stocks, precious metals, real estate - everyone chooses the best instruments himself.
Also read: How to Prepare for a Financial Crisis.
And if there is a default?
Anything can happen to the economy - Russia already went through this in 1998. There are no guaranteed ways to avoid this. Adapt to the situation; do not store all your capital in one currency, follow the news, and make decisions based on the current situation.
All these questions are, of course, important. And indeed there is a possibility that you will be disciplined to save money for 20 years, and then you will lose everything in one day.
This, however, should not serve as an excuse to do nothing and wait for old age, and then - come what may. Make an effort now to eat well in retirement, travel, and delight grandchildren and great-grandchildren with gifts. And let the state pension be a bonus, not a means of survival.
Adapted and translated by The Cop Cart Staff
Sources: Life hacker