Would you agree that if you don't know the rules of a game, your chances of winning are slim to none? If you answered,"Yes!", you are correct. It'd be like recruiting a Pop-Warner, Pee-Wee Quarter Back to your High School football team. That wouldn't make sense!
The rules and procedures to win at the money game are no different! Yet people never go to practice, they don't study film, & then they blindly walk onto the field and expect to compete at a high level. It's time to stop procrastinating and start practicing!
The rules and procedures to win at the money game are no different! Yet people never go to practice, they don't study film, & then they blindly walk onto the field and expect to compete at a high level. It's time to stop procrastinating and start practicing!
Below are 3 Financial Concepts that conceptually are simple, yet are extremely under estimated and under practiced. I teach them to my clients and advise them to teach their kids. If we can get our kids in the habit of learning concepts such as these, our future economy will not suffer as badly as today. The rich stay rich and the poor stay poor because concepts such as these are not taught early enough.
3 Simple Financial Concepts
1.) Compounding Interest & The Rule of 72 [1]
Albert Einstein famously said, "Compound interest is the most powerful source in the universe". He went on to say, "He who understands it, earns it...he who doesn't... owes it.".
One of the best ways to illustrate the importance of compounding interest is The Rule of 72, rumored to be created by Luca Pacioli (Famous Mathematician).
The Rule of 72 is a mathematical concept that approximates the number of years it will take to double the principal at a constant rate of return compounded over time." - World Financial Group
The Rule of 72 equation is : (72 / Annual Interest Rate%) = (Yrs. It takes Initial Principal to Double)
Example : If Interest Rate = 1% (Avg. Annual Return On Investment),
Then (72 / 1) = 72 (Years to Double Your Principal)
Example : If Interest Rate = 1% (Avg. Annual Return On Investment),
Then (72 / 1) = 72 (Years to Double Your Principal)
The 'Interest Rate', when using the Rule of 72, is an assumption of an Average Interest Rate over a period of time. So when looking at the past performance of a "Index" or a "Stock", it can give you an idea of what you will be looking like in the future, assuming the Index or Stock averages the same rate of return.
The Rule of 72 can work for you, if you have an investment with positive growth, or against you, in the interest you pay on your credit cards or mortgage.
Do the math of what the bank charges on a monthly basis for your credit cards. Is it 18%, 22%, 30%! What Rate Of Return does your bank offer on their Saving Accounts and CD's?
The Rule of 72 can work for you, if you have an investment with positive growth, or against you, in the interest you pay on your credit cards or mortgage.
Do the math of what the bank charges on a monthly basis for your credit cards. Is it 18%, 22%, 30%! What Rate Of Return does your bank offer on their Saving Accounts and CD's?
2.) Investing Time & Money Wisely [3]
If there is anything more valuable than money/currencies, it's time. It's true when they say "Time Is Money". It simply ins't enough to have your only savings be in a 10 year CD or regular savings, if it isn't growing at a rate to meet your goals. If your Return On Investment (ROI) is too low, then you'll need a lot of time to meet your goals. There are 2 potential situations, where time can be an issue.
The first is loss of time due to procrastinating. If you wait too long to start saving, it can mean a difference of retiring comfortably or not.
Take a look at this graph explaining the cost of procrastinating...
With only a 5 year difference, which doesn't seem like much, actually costs 'Person B' $266,326!
Real life statistics are much worse. Only 46% of working American's have less than $10,000 for retirement. The U.S. Census Bureau found, 1 in 6 elderly Americans is currently living below the poverty line & they're expected to retire this way.
The 2nd potential loss of time brings us to Concept #3...
3.) Managing Cost & Risk
As I said earlier, it's not enough to have your only savings be in an account earning less than what will meet your goals. Investing just for the sake of investing is not very wise. You better make sure your adviser explains a few things about any potential cost or risk that can take away from your retirement. For instance :
- Taxes - If you earn it, spend it, invest it, or die you will be taxed. What type of taxes will you be paying when you withdraw from your account, if any? Is it tax deferred or tax exempt? If you are passing an estate over $5 Million, are your beneficiaries protected againstt the full estate tax? It's important that you know so you are not surprised if you or your beneficiaries get hit with a tax bill.
- Risk - As we saw in the 2008 Market Crash, if your account was fully exposed to the pitfalls of the market, you could've had an unwanted haircut. Find out if a Stop Loss is appropriate for your account. If it's an Index Type Fund, ask what's the floor(Lowest ROI)and what is the ceiling(Highest ROI)? This is crucial, because not only could you lose money, you could also lose time if your account doesn't perform the way you need to retire! As we get older, time becomes more valuable than money.
- Inflation - Inflation defines the increase of goods & services throughout history, via the Consumer Price Index (CPI). Ask your adviser,"Based on passed performance of this fund, has this fund out beat inflation?". The average inflation rate in the past 20 years has increased roughly 2-3%. So if you are averaging 2% ROI & Inflation averaged 2%, then your real ROI is 0%. Inflation actually hasn't risen lately, but it's important to know these things.
- Advisory Fee - What is your Adviser's fee for managing your account? They usually charge 1%, which isn't bad, if they are doing their job right. Be wary if your Adviser is moving your money from fund to fund without your knowledge, cause each transfer is potentially costing you a fee. Make sure your adviser has a good reason for allocating your funds. Paying a fee is not a bad thing cause that's the cost of doing business, but unnecessary transfers can cost you in the long run.
All of these losses and or taxes are not only a potential loss of money, but also a loss of time! If there is an investment product that is suitable for your needs and can save you from a huge tax bill or unnecessary costs, then it's in your best interest to know about them. Not only did those in 2008 lose a substantial amount of money, but they also lost a substantial amount of time. You can't make time back-up. Nor can you make your money back if you have little time.
I beg you to not take your retirement lightly. We will see in the coming years the effects of lost money and time will have on the baby boomers. In fact President Obama was talking about implementing a rule that will force adviser's to do their jobs and better manage 401(k)'s! ThisConflict of Interest is hurting the middle class. I thought that's why we paid them the advisory fee? I guess not.
Disclaimer(s):
[1]Rule of 72 - All figures are for illustrative purposes only and do not reflect an actual investment in any product. Additionally, they do not reflect the performance risks, expenses or charges associated with any actual investment. Past performance is not an indication of future performance. The Rule of 72 is a mathematical concept that approximates the number of years it will take to double the principal at a constant rate of return. The performance of investments fluctuates over time and, as a result, the actual time it will take an investment to double in value cannot be predicted with any certainty. Additionally, there are no guarantees that any investment or savings program can outpace inflation.
[2] Hypothetical Illustration - This is a hypothetical scenario for illustration purposes only and does not present an actual investment for any specific product or service. There is no assurance that these results can or will be achieved.
[3] Tax Legal Advice Disclaimer – Tax and/or legal advice not offered by World Financial Group, Inc, or their affiliated companies. Please consult with your personal tax professional or legal advisor for further guidance on tax or legal matters.
Disclaimer(s):
[1]Rule of 72 - All figures are for illustrative purposes only and do not reflect an actual investment in any product. Additionally, they do not reflect the performance risks, expenses or charges associated with any actual investment. Past performance is not an indication of future performance. The Rule of 72 is a mathematical concept that approximates the number of years it will take to double the principal at a constant rate of return. The performance of investments fluctuates over time and, as a result, the actual time it will take an investment to double in value cannot be predicted with any certainty. Additionally, there are no guarantees that any investment or savings program can outpace inflation.
[2] Hypothetical Illustration - This is a hypothetical scenario for illustration purposes only and does not present an actual investment for any specific product or service. There is no assurance that these results can or will be achieved.
[3] Tax Legal Advice Disclaimer – Tax and/or legal advice not offered by World Financial Group, Inc, or their affiliated companies. Please consult with your personal tax professional or legal advisor for further guidance on tax or legal matters.
