Even a year's worth of lost interest earned on savings money can ruin a good savings plan. Any American saver that might choose to spend their saved money instead of leave it in the account can first take a look ahead and calculate how much interest they will lose.
Savings accounts that earn the saver interest lose more than the amount of a withdrawal when the balance goes down. The interest the money would have earned in the account is lost.
Taking out the money to spend today makes the saver lose forever the whole sum of money that earns them interest.
1. Take a look ahead. The count of dollars and cents in the account grows each savings period. Interest that is never earned on the money earned at work and deposited in savings erases a part of that growth. Take a seat at the desk and figure out the full loss.
Even a small amount of money withdrawn could have grown into a valuable amount by earning interest for 5 to 50 years.
2. Look up the number for the exact interest rate for the savings account. Unless the number is already committed to memory. This is the number that tells a saver how much of their financial plan that depends on the deposits earning interest is ruined. Wasting 1 to 2 percent compound interest counts for a serious loss.
Work pay that was earning more than 2 percent does not come cheap. The loss after a withdrawal is hard to make up for. More work hours on the job and then a larger deposit than was made in the account the first time.
The interest rate is the basic deal. Know the number by heart.
A change to the savings plan that moves money into a spending plan for the short term lowers the growth line that gets its rate of increase from this number.
Use the annual compound interest rate (IR).
3. Copy the date the account balance went down from the bank statement records. This is the day the choice to withdraw money starts to count by cancelling the opportunity to earn more interest. There is nothing a saver can do to get the interest back on any future day.
4. Choose the length of time there was an opportunity to keep the money in the account. Every saver picks out their interest earning savings account with a plan in mind for using it to grow their savings over time. The plan is to add up the interest for any length of time from 6 months to more than 50 years until retirement day.
But, they only get as much as they actually leave the money in the account long enough to earn. Use the length of time planned on the day the money was deposited to find out how much the long term balance was lowered.
5. Calculate the loss. The result tells a saver how much interest on the deposited amount (DA) would have added up in the account starting on the actual withdrawal day and ending on the planned withdrawal day. The lost interest number (LI) is the dollars and cents the saver tried to get away with leaving out of their future savings plan.
The time between the actual withdrawal day and the planned withdrawal day is the length of the lost opportunity (LLO) in years. (Note: Use fractions for savings periods less than one year. E.g. 6 months = 6/12 years or 0.5 years).
Divide up LLO into the number of single savings years (SYs) and any months left (ML). ML is a fraction of a year.
For every savings year, use the formula: LI = DA * IR.
Calculating lost interest during five and one-half years of lost opportunity takes six steps.
SY1: LI1 = DA0 * IR. Note. DA1 = DA0 + LI1
SY2: LI2 = DA1 * IR. Note. DA2 = DA1 + LI2
SY3: LI3 = DA2 * IR. Note. DA3 = DA2 + LI3
SY4: LI4 = DA3 * IR. Note. DA4 = DA3 + LI4
SY5: LI5 = DA4 * IR. Note. DA5 = DA4 + LI5
ML: LI6 = DA5 * (IR*ML).
Total lost interest (TLI) = LI1 + LI2 + LI3 + LI4 + LI5 + LI 6.
For example, on Tuesday, July 31, 2012, after work, a saver deposits $100 into their savings account that earns 1 percent annual compound interest and has a balance of $1,000. Their plan was to keep the money in the account for 10 years until Monday, August 1, 2022. But, they withdraw the $100 on April 1, 2014, 9 years and 4 months before the planned withdrawal day, just so they can spend the cash on a model boat.
There are ten steps to calculating the lost interest.
SY1: LI1 = 100 * 0.01 = $1. Note. DA1 = 100+1= $101.
SY2: LI2 = 101 * 0.01 = $1.01. Note. DA2 = 101 + 1.01 = $102.01
SY3: LI3 = 102.01 * 0.01 = $1.02. Note. DA3 = 102.01 + 1.02 = $103.03
SY4: LI4 = 103.03 * 0.01 = $1.03. Note. DA4 = 103.03 + 1.03 = $104.06
SY5: LI5 = 104.06 * 0.01 = $1.04. Note. DA5 = 104.06 + 1.04 = $105.10
SY6: LI6 = 105.10 * 0.01 = $1.05. Note. DA6 = 105.10 + 1.05 = $106.15
SY7: LI7 = 106.15 * 0.01 = $1.06. Note. DA7 = 106.15 + 1.06 = $107.21
SY8: LI8 = 107.21 * 0.01 = $1.07. Note. DA8 = 107.21 + 1.07 = $108.28
SY9: LI9 = 108.28 * 0.01 = $1.08. Note. DA9 = 108.28 + 1.08 = $109.36
ML: LI10 = 109.36 * (0.01*(4/12)) = $0.36
The total lost interest (TLI) = $1 + $1.01 + $1.02 + $1.03 + $1.04 + $1.05 + $1.06 + $1.07 + $1.08 + $0.36 = $9.72 (Note: The interest amounts are truncated to the whole cent. Using parts of a cent, the interest adds up to $9.73.)
The number of steps is always the number of single years during the length of the lost opportunity plus one more step for any additional months. After the lost interest amounts are calculated in steps, the only calculation left is adding up the total lost interest.
Interest earnings are lost every year and each month.
U. S. Labor Department, Savings Fitness: A Guide To Your Money and Your Financial Future (October 2010).