Have you come across situations where you hear a statement, read someone’s story, or even see a picture that just seems “Wrong” in some way? Our initial reaction is “That CAN’T be right!”
I’m sure we all have – they get stored away in our individual memories, and might become part of “Grand-dad’s crazy stories” in years to come. i.e. They remain important to us once we work out where the truth is.
Well, something I read on this website recently had me scratching my head – my knee-jerk reaction was to think “That CAN’T be right, surely?” And, just to prove how wrong it was, I opened a blank Excel page and set up the calculations so I could PROVE it wrong.
Result? It proved ME wrong – and proved the initial comment RIGHT !!
Let’s try it on you:-
Re: taxes, I heard a really interesting anecdote at a Tony Robbins event I attended in Dallas last year. If you take $1 and double it 20 times you get a little over $1MM. If you repeat that same process but this time take out 30% tax at each stage- instead of ending up with $1MM+ you end up with just over $30k. A staggering difference!
What was your immediate reaction? Was it like mine?
BTW, in my calcs, the figure came to $40k, not $30k – but hey, even now, having worked it out myself, I still find this astounding. In essence, doesn’t this show how important it is to “look after every cent?” Like, what if our expenses are 30% higher than they should/could be? Isn’t that cruelling our futures in much the same way as a 30% Tax would?
And my BIG question – was Steve McKnight aware of this way back in 2001 when he was getting “Ten cups of tea out of each teabag?” ;)
PS Try working out what effect a tiny 5% tax would have had on that same calculation. What would your brain tell you, even now that you know it could have an unexpectedly large impact?
Happy head-scratching – and mind-broadening !!
TerrywParticipant@terrywJoin Date: 2001Post Count: 16,213
- This topic was modified 3 years, 7 months ago by Benny.
Very interesting Benny.
This is the first time that I had heard of this so I just made a spreadsheet to test it out and I got similar results. Very interesting.
My results were
$1 double 20 times becomes $1,048,576.
$1 doubles 20 times with 30% tax on the income component becomes $40,642
I agree totally with your results Terry. It made me sit up and take notice !!
Did you try doing the 5% one? Even that tiny amount made a HUGE difference to the take-home amount. It took nearly 40% off that $1m figure !! When expenses compound, they have a massive effect too.
As we start to explore the “Millionaire Next Door” along with its comments on frugality, this topic came back to me. This describes just how expenses can also compound to cruel one’s efforts at gaining wealth. Start back at the first post and test your guesses against the reality of compounding growth – less compounding expenses !!!! It shocked me when I went through it.
Of course, in that example we used a simple “doubling every year” of income to show its compounding benefits – but also look at how a defined percentage of expenses plays havoc with those compounding income figures. Shows that frugality is every bit as important as is growing your income.
Steve, perhaps you could provide a simple Excel example where differing values can be tested? And of course, even as we take a simple doubling of income, it might be that we can more than double it each year, with (say) a 20% uplift offsetting many expenses to prevent the decimation of the growing wealth.
I’m sure there are many other new thoughts that can be derived from this example – greater minds than my own will no doubt add much more value around this fascinating subject. With the Millionaire Next Door being studied, I’d like to see what added value might appear right here !!! Please…. ;)
Go for it !!!
BennyJaxonParticipant@jaxonaJoin Date: 2014Post Count: 284
Great post, I think this shows the importance of a few really key financial basics.
Reducing expenditures (to better invest that created excess)
Minimizing Taxation / structuring
Love forecasting for myself :)sinnersavedbygraceParticipant@sinnersavedbygraceJoin Date: 2020Post Count: 4
Guys, sorry but what am I missing here. I did the numbers on excel but I didn’t get to the $40k that you both did.
I got the final number of $891,289.6. Here is my excel calc (link to the shared file in Dropbox)
I’m sure both of you and Tony Robbins are correct but I just wanted to learn where I made the mistake :)
I took a look at your workings and noted a couple of things:-
1. After the second line, you were only removing 15% instead of 30% and
2. You seemed to double the original expected figure (1, 2, 4, 8, 16, 32, etc) instead of doubling WHAT REMAINED after the 30% tax was imposed in each year.
So to clarify, your first 4 years in the Net Asset column showed this :- 1, 1.7, 3.4, 6.8
…while mine showed 1, 1.7, 2.89, 4.91
After 10 years you had $870.40 while I had $201.60
Did that help?
BennysinnersavedbygraceParticipant@sinnersavedbygraceJoin Date: 2020Post Count: 4
Ah yes you’re right on your point 2. I have now doubled it on what remained and my ending result is 66k.
On your point 1, it looks like I only apply 15% but what I actually did was applying that 30% to the increase in asset (not the whole asset itself), because we are taxed on the increased of asset not on the total asset.
But anyway the point on compounding is so well made. Thanks for sharing this with us Benny!
we are taxed on the increase of the asset not on the total asset.
That’s a very good point Sinner. Tony Robbins does say to “take out 30% tax at each stage” and I hadn’t questioned it further, as my calcs seemed to meet with his original answer.
Well considered on your part though – that was a good catch.