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The Price of Freedom. | |
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{The following is a blog entry from site member, JeffBone. A link to his blog can be found at the bottom of Page 2.} ...Financial freedom, that is. This discussion is directly related to long term investments and your goal to a good retirement. The ten-percent solution is nothing new. Any basic financial book will tell you that if you invest 10% of all you make, for long term growth, you can have financial freedom. Not very exciting, I know, but let's play a game to illustrate. For now, bare with me on the numbers before you go off the deep end and say how you can't afford that much. Presume you invested $2400 a year (that's $200 a month - $50 a week) for the next 30 years. Lets also assume you can make an annual average return of 15%. How much do you think you'll end up with in 30 years? Most people will do simple math: $2400 X 30 = $72000. Now, 72K is nothing to sneeze at. But what will that be worth in 30 years? (inflation etc). Here's the real value: $1.4 million. Here's another one: if you were to put away $30/month, starting at age 18 and continued until age 65, how much do you think you'd have? (again averaging a 15% gain). You'll have close to $2 million. How does this work? The key is compound interest. That is, interest paid on not only the principal (the amount you invested), but the interest paid on the interest. $30 dollars a month - a dollar a day from age 18- equals $2 million bucks. Young people, take note. The question was previously posed on how you get the money to invest - at the end of the month there's nothing left over. How true that is. If you've been reading my blog up to this point, you'll recognize this phrase: Pay Yourself First. If you wait until the end of the month before taking your cut, there will be nothing left - there never is, no matter how much you make. Why is that? Any "extra" money is too tempting. You may not even notice you're spending it. That's why you must pay yourself first. Lets recap: Rule 1) Pay yourself first Rule 2) By following Rule 1, take 10% of your earnings (as soon as you're paid) and invest it. I guarantee if you follow those two rules, you won't even miss that 10% at the end of the month. If you don't believe me, start with only 5% and see what happens. If you take home $300/week, 5% is only $15. Most people spend that on Tim Horton's in a week, to put it into perspective. How Do You Invest? Planning to put away a little cash each pay is the first step...but 'where' do you put it? Before I get to that, here's where not to put it. -Do not keep it in a box at home. Inflation alone is killing the money's worth (plus it's way too easy to dip into!). -Do not keep it in a chequing account. Chequing accounts pay notoriously low interest, and usually come with higher bank fees. -Do not keep it in a regular savings account. "Savings" accounts are pitiful in terms of interest. If you must use a savings account, check out ING Direct. They pay decent interest rates and have 0 fees. I have one of their accounts myself. So now that we've covered the don'ts, lets cover the do's! I've said it before, and I'll say it again: The best investments for the novice investor, the person who wants to remain relatively hands off, the person who's willing to accept moderate risk, or for the person who's in it for the long haul: the RRSP. |
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