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Friday, September 18, 2020  
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Household Math: What is the real return?

Scott Bilker Scott Bilker is the founder of DebtSmart.com and author of the best-selling books, Talk Your Way Out of Credit Card DebtCredit Card and Debt Management, and How to be more Credit Card and Debt Smart. Receive the 5-Year Loan Spreadsheet when you subscribe to his email newsletter.

I saw this question come up in a Dateline NBC piece on retirement. So here goes: You have an investment that delivers a 7% return each year. However, you are charged a 2% management fee. What is the real rate of return on your money?

Try to figure it out yourself then scroll down for the answer…

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The answer is NOT 5%. Close, but not exactly.

It’s 4.86%.

Think about it like this:

You deposit $100 in the investment.

At the end of one year, you have a 7% return. That’s $7. Now your account balance is $107.00.

But now those investment managers take their 2% from the $107.00, which comes out to be $2.14.

That leaves you with $104.86 or a 4.86% return for the year.

A more straightforward solution is: Rate of Return = (1+0.07)(1-.02)-1 = 0.0486 = 4.86%

Please comment below, and let me know if you got it or if it was too hard, too easy, etc.

This entry was posted in Household Math. Bookmark the permalink. Read more articles by Scott Bilker. (Also see articles by all authors and articles in all categories.)



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