2020. So many possible things to worry about: politics, personal well-being, family, jobs, the economy, the stock market, the coronavirus. If things feel like they’re out of control, it is best to focus on what you can control.
Take Control of Your Path to Financial Freedom
In terms of finances, the timing and amount of your savings are two things you control. While savings may be thought of as a negative, they are really just spending delayed for the time when you no longer have income. The more you save now, the sooner you have the option to reduce or eliminate your current income needs.
The elimination of your income needs is often referred to as “retirement,” but the notion of separating from work at age 65 with a pension and moving to Florida to play shuffleboard is long gone. A better way to think about retirement is “financial freedom.” Work now becomes a choice and provides the freedom to choose your own path.
Start Early to Maximize Growth
The key to good savings is easy: Start early and automate everything. Starting early takes advantage of the magic of compound interest. In this case, the interest you’re earning is the investment returns that not only grow based on the original principal, but also based on the returns that investment generated.
A popular Benjamin Franklin quote explaining compound interest is “Money makes money, and the money that money makes, makes money.” Albert Einstein was quoted saying compound interest was mankind’s greatest invention and called it the eighth wonder of the world. It’s debatable whether these quotes are accurate, but the value of compound interest is clear.
These charts illustrate the value of starting early and the amount of saving that is required at various starting points.
The difference in waiting until you are older to start saving is dramatic. If you started saving at age 20, you would need to invest $361 a month to reach $1 million by age 65. If you started 20 years later, at age 40, you would need to invest $1,436 a month (four times as much) to reach the same target by age 65. So, start saving as much as you can, as early as you can.
Asset Protection Pay Yourself First by Automating Your Retirement Savings
And as noted above, automation is your friend. Most people, including me, are very busy, so personal finances often fall to the bottom of the to-do-list. That lack of priority can cost you an enormous amount of money over time.
But if you automate your savings—i.e. deduct retirement savings from your paycheck to your 401k, or out of your bank account to an investment account—you will always “pay yourself first.” On a related note, you should automate your bills as well so any leftover funds become your monthly spending budget. Simple, easy to follow, and most importantly, less stressful.
I purposefully do not mention investment types and account savings vehicles. There are lots of ways to invest, from taxable brokerage accounts to IRAs, 401ks, and more sophisticated strategies like private placement life insurance. Other than a general recommendation to take advantage of the available tax incentives to save, the best vehicle for you depends on your goals and individual situation. You should consult your financial planner for specific recommendations.