Extrapolating is a big word for me.

I was thinking about my Cash Money Life’s Financial Goal Challenge and was doing some simple calculations to see where it would lead once I achieved the goal set in my challenge.

Question

If I keep contributing each month to my emergency fund,

where would my emergency fund be 5 years from now?

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Using this simple, savings calculator, I entered a zero starting balance, a monthly deposit at $250, and an annual interest rate of 4 percent.

• Year 0 $3,055.62
• Year 1 $6,235.72
• Year 2 $9,545.39
• Year 3 $12,989.90
• Year 4 $16,574.74

My curiosity got better of me and I wondered what would happen using the same information but with an annual interest rate of 5 percent.

• Year 0 $3,069.71
• Year 1 $6,296.48
• Year 2 $9,688.33
• Year 3 $13,253.72
• Year 4 $17,001.52

The difference starts to become more noticeable at the end of the 5th year, almost a $500 difference. The power of compounding proves that putting money away in an interest bearing account that returned an annual interest of at least 4 percent will earn you money that you do not have to work for.

Why was I curious about the results of this?

Having lived all over the country and worked both seasonal and year-round jobs, I can appreciate having an emergency fund. I know it is very well possible to keep expenses below $1,000 per month in some parts of the country. In the more expensive regions, it will be higher than that.

I am operating under the presumption that my monthly spending would be $1,500 as a single person. At 4 percent, it appears after 5 years I would have enough to support myself for 10 months. 5 percent means I would have enough to support myself for 11 months.

What about a relationship?

There is always a potential for a relationship, in fact, I am in one right now. If I were to presume that our monthly spending would double to $3,000 a month, then at 4 percent, that would mean in 5 years, we would have enough to support ourselves for 5 months. Almost 6 months at 5 percent.

What about parenthood?

I always wonder about fatherhood and I know that it pays to have an emergency fund as a parent so if I were to become a father then I would need to be prepared. Operating under the assumption that the three of us would spend an average of $1500 a month totaling $4,500 then 4 percent after 5 years would just cover 3 months. Same results for 5 percent.

The point of my message is this, as long as you keep contributing to your emergency fund on a monthly basis in an interest-bearing account, you will continue to grow your emergency fund to a point where you have a cushion should an emergency arise. No one can predict the future but you can hedge your bets.

Editor’s Note

With the wild ride of the stock market and interest rate cuts and increases over the last few years has proven no one can predict what the future holds for us, it is safe to say as long as we can earn some interest on our account, even 1 percent, we would still be growing and compounding our investments.

I would love to hear your thoughts on this matter.