0:00

So, I'll give you a minute to read this problem again and

Â you'll recognize this problem.

Â And I the reason I'm doing it is because it kind of captured everything we did

Â last time.

Â But as you read it, you should see a difference.

Â So I'm throwing in something new into the problem, so

Â that you can think creatively to do this problem again.

Â So the problem again states that you're 30 years old, you believe you will save for

Â the next 20 years until you're 50.

Â This is exactly the same as last time for 10 years following

Â that until you retired at age 60, you have an inability.

Â Because of your expenses, college expenses, weddings and so on to save.

Â And remember, you are 30, you are trying to figure your life out in the future and

Â it's not difficult to do.

Â This is all for your own thinking, not somebody else telling you what to do.

Â So I'm kind of empowering you to think for yourself.

Â 1:00

Now at 60, if you want to guarantee yourself

Â $8,000 per month after that until you quote,

Â unquote are no more at 80.

Â How much do you need to save for the next 20 years starting at age 30?

Â But the one wrinkle I've thrown in is I've made this from an annual

Â to a monthly problem and I'm going to let that stay up there for a second.

Â Since we've seen this problem before, I'm creating a new twist and

Â we shouldn't be able to worry too much about the fact that there's months now.

Â On the other hand, I think the problem becomes much richer and

Â much more real world, because of compounding.

Â And you should always responds for that.

Â So let's get started and I'm going to, since we are beginning this class,

Â I'm going to just try to address this issue right away.

Â So first thing you always do is draw a time line and

Â I'm borrowing this timeline from last time, but notice I've done something.

Â And if you're looking at this slide carefully, what you'll notice

Â is that I have made my life very simple by doing the first thing, which

Â is under my control is defining a period according to the nature of the beast.

Â So the problem here says that I'll be saving monthly and

Â the time line converted to months solves a lot of my problems.

Â So the question now is between years 30 and

Â 50, there were 20 years, but actually there are 240 months.

Â Again, between years 60 and 80 there were 20 years?

Â There are 240 months.

Â So the question is between 50 and

Â 60 when I'm not able to save, but I'm not dissaving.

Â How many years of that?

Â Ten, but recognize that no longer can you work with the errors.

Â 3:39

And as I told you last time, don't look back.

Â Look forward, because you're making decisions.

Â And then decide when you look forward, what is it that you're trying to solve?

Â So here, you want how much per month?

Â I believe my numbers now are 8,000 per

Â month you need for a long period of time.

Â So the PMT input in solving this problem is

Â 8,000 and we'll do it in a second.

Â M is how much?

Â M now is not 20 years, it's 240 months.

Â Basically, this has to match this.

Â If these two are not aligned, you have a problem.

Â Most importantly, you are to align this with the problem.

Â So if an annual interest rate is stated at 8%,

Â the monthly interest rate should be 0.08/12.

Â If you were getting compounding on a quarterly basis, it would be different.

Â Daily basis, it would be different.

Â So the question here is now, how do I solve this problem and

Â what will it tell me?

Â Because we have done this problem before, I'm going to recognize you

Â remember that the first thing I'll try to do is PV of what I need and

Â I'm going to put subscript here 60.

Â So that, it's you see the calculator Excel doesn't know where you are, but you do.

Â 5:15

So you know when you solve this problem,

Â you're not at 0.30, you're 0.60 in the future.

Â You're already there in your mind and you're looking forward,

Â you're not looking back.

Â Even though you are at 60 and it's yet to come 30 years from now,

Â when you're solving this piece, you're looking forward.

Â The same principle.

Â So let's see.

Â This is a tough one to do in your head.

Â As I said, if you do it, there's something wrong with you.

Â So let's presume you can't do it and let's use Excel to do it.

Â So what I'm going to do is I'm going to toggle and go to Exce.

Â So let's see.

Â And I had problems myself with this class that I would do a lot of execution,

Â but I'm not doing execution without hopefully, a need for doing it.

Â So hopefully, this is helpful to you without being hand holding.

Â So remember, what are we trying to solve for it?

Â We are trying to solve for a PV problem, even last time.

Â Remember, I screwed up is I thought I was solving a PMT problem, but

Â I was actually solving a PV.

Â So the thing that your solving for is function and its PV.

Â Remember in your head, it's PV in year six now.

Â What is the interest rate?

Â 0.08, but you gotta pause.

Â You do not have annual compounding, you have monthly compounding.

Â So you divide that by 12.

Â How many periods do you have?

Â 240.

Â Don't put 20, because if you put an interest rate of 0.2 divided by 12 and

Â you put 20, your annual interest rate is almost nonexistent.

Â Which by the way, matches with reality these days.

Â But for the time being, [LAUGH] let's do this problem.

Â So you have 240 pmt and then fv is what?

Â We don't have a future value here and

Â you have you got all the numbers in there, 240, yes.

Â PMT is something I do know.

Â So the PMT comes before a FV and I press 8,000.

Â 7:27

So what do you get?

Â You get $956,434 and

Â I'm going to avoid the cents.

Â So everybody recognize this?

Â So, it's pretty straightforward and I'm going to leave it there and

Â I'm going to toggle back to our presentation.

Â So now we know, by the way, this is art form.

Â I'm going between that different media without you even knowing,

Â I hope you like that.

Â Anyway, so PV60.

Â We saw was, and I'm going to

Â confirm this with my own notes,

Â 956,434.

Â I'm writing all these details, simply because as I said,

Â my philosophy is that I will not give you resources unless they

Â are absolutely necessary for you to then sit back and consume.

Â I want you to work through these problems yourself, so

Â I'm giving you some minimal information.

Â Now the problem is I cannot stay here.

Â I got to match the tools I have to the problem I can do.

Â Now clearly, when you become proficient, you can do this on an Excel and

Â do it all faster and so on.

Â But let's do it a little bit logically, I want to bring it back here.

Â Why do I want to do that?

Â And the reason is,

Â I do know how to calculate a PMT, which I'm trying to calculate.

Â What is my saving monthly?

Â If I know its future value at this point, but if there's a gap, it's a problem.

Â So why not take the problem to something you know how to do rather than

Â just wait there and expect some magic to occur and it's not a big deal.

Â It helps your thinking.

Â So now what do we do?

Â Let's go back and try to understand what's going on and

Â do Excel again and so what I'm going to do now is I'm going to,

Â as I said before, toggle back to Excel.

Â Now the good news is I already have a number up there, 956.

Â So let me take =pv.

Â Why did I do PV?

Â Because now, I am bringing something in to your 60 to your 50 to match what I want.

Â So let's do it.

Â We have to be a little careful, because I think, as I said, if you're not careful,

Â you'll but in the wrong numbers.

Â So now, 0.08/12.

Â Again, please remember, not 8%, but 12 of that.

Â How many periods?

Â Well, between 50 and 60.

Â There are 10 years, put 120 months.

Â So we've got those two numbers and now we need to figure out what do I

Â put in next and remember the next item here is PMT.

Â That's how it's been set up in Excel, but I don't have a PMT.

Â This time, I don't.

Â I put a zero there, but I do have future value.

Â And the future value is sitting in its cell.

Â We just solved the problem, I retained that cell A1.

Â Look what happens.

Â I think this happened last time too.

Â Just because you're doing it monthly, it doesn't mean this won't happen.

Â The value has dropped drastically.

Â In fact, to less then half and what's the reason for it?

Â 120 months have passed and the monthly interest rate is non-trivial.

Â So now we are at a point where this again.

Â Again, let me just toggle back to the PowerPoint.

Â Now the good news is where am I?

Â I am now at this point and I have a number that I can deal with,

Â I think it's 430,896.

Â 430,896.

Â So what does this number mean?

Â Let's just pause for a second.

Â It was more than twice here.

Â 11:40

So what does this number mean in English?

Â This is the amount of money I should have in my bank at at 50 to support what?

Â To support all my post retirement 8,000 a month expenses.

Â So that's one way of thinking about it.

Â So now, however, I don't have that money.

Â [LAUGH] So I need to act today, starting end of next month to start saving.

Â But what kind of a problem is it?

Â It's a PMT problem.

Â How much money do I save a month, who's future value I already know?

Â Make sense?

Â Let's do it.

Â Just one more step and then after that, I will take a break,

Â because I want you to kind of think about this a little bit and see what's going on.

Â So let's go to Excel.

Â So now if you look at the two numbers on top, the first number is,

Â it's showing negative, simply because I'm putting a positive number as a payment.

Â So now, 430 needs to be in the bank at which time?

Â At time age 50.

Â That is 956 it grows into, if it stays in the bank or in a portfolio.

Â So let's do the PMT problem, because now we're solving for PMT.

Â How many periods do you need?

Â First is you need 20 periods, but you also need the rate of return.

Â Before that, 0.08 divided by 12.

Â Everybody got that?

Â How many periods did I save for?

Â 20 years, which is 240 months.

Â Fair enough?

Â Got it.

Â Now the next number and again, you have to just be paying attention,

Â because as to what Excel offers and in what sequence.

Â And don't try to memorize it, because you got junk in your head doesn't help.

Â Next item is PV.

Â We know we don't know the PV.

Â We could do the PV, but we don't know it.

Â What is the future value and where is it sitting?

Â It's not sitting in cell A1, it's sitting in cell A2.

Â Remember, what's sitting in cell A1 is the future at year 60 and

Â you want it at year 50.

Â So let me see what I did.

Â You can see, I can guess when I'm doing something not quite right.

Â So you have A2, 240.

Â You see, I told you you should put zero there and somehow I put a zero and

Â it disappeared, but I have intuition.

Â And once you start doing this number, a number will jump out at you and

Â say that doesn't make sense.

Â [LAUGH] So saving $3,000 a month,

Â just doesn't make sense today to get $8,000 in the future.

Â Look how much are you saving.

Â You're saving about $732.

Â 15:06

Basically, what we have done is we have solved the problem where

Â we started out wanting 8,000 a month, 240 times.

Â We figured out its present value at this state.

Â You figured out, it's present value at this stage.

Â And then we said, how much do you need to save every month to solve this problem?

Â Look I'm not going to enter the items here, we already did this.

Â What I'm going to enter is what did we get over here?

Â We got 732 and I want you to think a little bit about it.

Â Look at the power of time in compounding.

Â I have to save only $700 a month plus 730.

Â But in return for that, I'm able to enjoy $8,000 a month.

Â The thing that has changed this time between the two.

Â Why is it that I can save so little and enjoy so much in the future?

Â One, because time has passed.

Â Two, because of the interest rate.

Â I repeat again, an interest rate of 8% a year,

Â which is 8% divided by 12 a month is a very high number.

Â First point.

Â Second point, yes, you are working hard hopefully,

Â to get the saving possible of 700 plus.

Â But remember, who's giving you the benefit?

Â The world is investing your money in good ideas, hopefully.

Â And we'll see what good ideas, later today.

Â That's the topic of today's class.

Â You are able to enjoy what the world has to offer through the ability

Â to invest in other things, so that other thing we call was portfolio.

Â But remember that portfolio grows over time, simply because of two things.

Â Movements mold the growth.

Â Higher the interest rate, higher the growth.

Â The two together is the profound effect of compounding,

Â which Albert Einstein said, he couldn't fathom.

Â And turns out that's why you need Excel and

Â other things to calculate these numbers.

Â So, I hope this put everything together one more time and

Â the small twist of going from a year to a month helped.

Â Do one last thing.

Â Answer the following question.

Â 17:35

If compounding is monthly and the stated interest rate is 8% annually,

Â what really is the annual interest rate?

Â I can give you the direction of the answer.

Â It has to be more because of pause, compounding and

Â I would take your time to solve that problem and we are not going to do it.

Â You have a formula, you have information.

Â Do it for yourself and it will help you understand.

Â The only difference is if going from months to a year instead of a year,

Â it took many years.

Â Again, just messing around with the time line.

Â