I wrote a blog a few months ago on Financial Literacy. I thought that I should follow it up with another set of thoughts on saving and investing.
Before I go any further, I should note that EVERYTHING that follows is someone else’s wisdom. All of this is borrowed, stolen, or plagiarized. There won’t be single original thought in this post. I’m not smart enough to have created any of what follows. I will try to give credit where I remember the credit is due.
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1) Live frugally-I learned this from my financial advisor, and also from my wife. Both happen to be the same person. The bumper sticker idea “live simply, so that others may simply live” works.
We drive cars with 100,000+ miles on them. We take care of them, and hope that they last to 200,000+ miles. We can afford new cars, but these old cars work well, they are safe, and cars are not an investment. Yes, I want a Porsche, but my Ford gets me back and forth to work just as well.
We splurge on a few things (mostly travel), but even there, we comparison shop. I have no desire to spend a lot of money on airline tickets or hotel rooms, if I can use my travel points and fly and stay for free. The point of our travel isn’t the plane trip, it is the destination.
2) Save a lot-Vanguard Investments has an advertising campaign right now, that says “Spoiler Alert- if you save a lot, you will have a lot”. Saving a lot is a good idea. My older daughter is in college. She already has an IRA account. My younger daughter will open an IRA as soon as she has her first job.
There is this idea in our society that the most important time to save for retirement is in your 50’s and 60’s. Wrong. The most important time to save for your retirement is when your young. My girls will start saving for their retirement in their teens. Later I will explain why (look for The Rule of 72 later in this post).
3) Invest a lot-in the interest of full disclosure, much of what I write here is based on the work of Jack Bogle, who is responsible for many of the ideas behind low cost mutual funds. He is credited with starting the Wellington Fund, and helping to lay the groundwork for what is now Vanguard Investments.
It is really easy in 2015 to invest quickly, easily, and at no cost (more about costs later). Because of Jack Bogle, and people like him, there are many low cost mutual funds (index funds). I can make a call to any mutual fund company, and in a few minutes, purchase shares of an index fund that tracks the S&P 500. When I do that, my money matches the performance of the largest 500 companies in the world, and almost no cost to me.
Jack Bogle doesn’t call a lot of attention to himself, but there are a group of people called Bogleheads, who understand that Jack Bogle is responsible for creating a lot of wealth for people who want to invest simply. Bogleheads sometimes refer to Jack Bogle as Saint Jack. His investments have created trillions of dollars of wealth (and I do mean trillions) for average investors who want a fair shake.
4) Costs Matter-this was a Vanguard Investment advertising campaign a few years ago, and it is also the basis of a lot of what Jack Bogle writes about. The investment company machine takes about 1/3 of all stock market gains every year in costs and profits. What that means is that for every 1 trillion dollars in stock market gains, big investing companies take 333 billions dollars off the top in profits from investors.
And they charge investors for advice, even when the advice is bad.
I don’t pay for advice. I read instead. I invest almost solely in index funds. So I pay no fees to anyone. The cost basis for my index funds is about 0.17% per year. So it does cost me a little bit to have my money in those funds, but I’m not making anyone else rich this way.
5) Invest Wisely-If I save a lot of money, but then I invest it poorly, I lose. So I try to invest wisely. That means that I do take some risk. I believe that I have to take some risk, in order to reap some reward. As I once read, “the biggest risk in life, is not taking any risks”. I don’t hide my money in my mattress, or bother with 1% CDs, except for emergency savings.
Be prepared to lost some money some years, when the stock market loses money. It’s not a big deal if you don’t need the money right away.
The average stock market return over the past 50 years is….pick a number. I’ve read approximately 8-10% per year. Some years higher, some years lower. Some years the stock market loses money. It happens.
I’m investing for the long term. For me, that means that I am saving not only for my retirement, but for my children, and their children too. So I’m investing (I hope) for 100 years from now.
6) Compound gains– this is my favorite part (I know, I am a geek). Let me share some math with you, known as “the Rule of 72”. The rule of 72 means that if you have a growth rate, divide 72 by that growth rate, and the answer is the number of years it will take your investment to double.
So for example, if you have $5000, and it grows at 7% annually (in a tax-free account like an IRA or 401k), it will double in (72 divided by 7=10 years). Get it? The higher the growth rate, the quicker the doubling time.
So for a real example- a fictitious 20 year old who saved $5000 in an IRA last year (I know one). Let’s pretend that the average growth rate is 10% over the next 50 years. Probably too high, but just for fun…..a 10% growth rate means that that money will double every 7 years.
She is 20. Her money will double at 27, 34, 41, 48, 55, 62 and 70. Seven doubles.
That $5000 will turn into: $10,000, then $20,000, $40,000, $80,000, $160,000, $320,000 and then $640,000.
Her initial $5000 investment may turn into $640,000.
What if she saves another $5000 this year in her IRA?
What if she maximizes her 401k contribution to $18,000 once she works full time?
If she does that, my hope is that she can share this wisdom with someone else someday.
Hal