We all go to school for about twelve years, kindergarten through high school. Some of us go to college and then graduate school. Personally, I went to school for three years beyond college with law school and took financial courses after that was over. In all of that time, economics courses, accounting courses and even tax courses, no course or school ever covered what we are going to talk about.
1. PAY YOURSELF FIRST! The IMPORTANT THING is GET STARTED RIGHT NOW! Whether you start off with $50 a month or $100 a month or $500 per month, FOR EVERY MONTH YOU DELAY, YOU ARE LOSING THOUSANDS OF DOLLARS. A little money invested consistently over a long time makes a LOT OF MONEY.
Let's look at what happens if you invest $100 every month for twenty years with a 7% return. At the end of 20 years, you will have paid in $24,000, but you will have $52,093 in your account. What if instead you leave the money untouched for thirty years? Still investing $100 per month, the investment pool will have grown to $121,997.10. Not bad. Let's see, we put aside $100 per month for 360 months, which would be $36,000. But our $100 a month investments earned almost $86,000, more than double the amount we put in!
How much would be there if the program runs for 40 years? The investment pool is now up to $262,481.34. Let's see, we put aside $100 per month for 480 months, which would be $48,000. But our $100 a month investments earned almost $215,000! $262,500 invested at 7% would give an annual income of $18,375 per year without touching the investment pool. On the other hand, we all wish social security were so good.
If you start at 20, at 60 you can have that income. Starting at 30 would allow withdrawal at 70. 40 would be at 80, etc. It is easy to see that the earlier the program is started, the earlier you can withdraw. But a program at 50 will still get you there at 80, particularly if you double the money to $200. Just $200 a month, beginning at 50, will give you almost $244,000 at age 80 when you would really need it. (Thought question: Let's see what if I could invest more?)
If I were running schools from elementary until high school, this one lesson would be repeated over and over again until it became literally part of the students' psyches. Projects in school would be done to demonstrate that lesson over and over again.
Richard Russell in his newsletter, Dow Theory, gives the example of a 19 year old who opens an IRA with $2,000 at an average growth rate of 10% (7% interest plus growth). After seven years this fellow makes no more contributions. A second investor waits until age 16 (seven years later). He also makes $2,000 contributions but he continues to do so faithfully until age 65 and gets the same return. Our first investor ends up with more money than the investor who contributes for the entire time. The compounding effect of the additional 7 years is phenomenal.
Note for Grandparents: Think about what would happen if you funded a Roth IRA for $2,000 per year for your grandchild for seven consecutive years and the
Most people have the expectation of working from the time they are 25 until at least 55 years old. Assuming a good education, many people would expect to make an average of $50,000 per year over that work life.
Total Years Worked: 30
Average Earnings per Year: $50,000.00
Total Money Earned: $1,500,000.00
Most People will have saved: $30,000.00
Amount Spent: $1,470,000.00
It is unlikely that any of us given $1,500,000 would give away $1,470,000 and only keep $30,000. Amazingly though, when done by the paycheck, that is exactly what happens.
2. THE WAY YOU PAY YOUR MORTGAGE IS COSTING YOU THOUSANDS OF DOLLARS!
Let me illustrate: You want to buy a house for a contract price of $180,000. You have a down payment of $30,000 so you need a loan of $150,000. The lender can provide a loan at 7% fixed interest for 30 years. If you pay cash upfront (we all wish we could), then the price of the house is $180,000. If you buy the house with a loan, however, the real cost with the $150,000 loan is $30,000 cash plus the total of the payments on the loan over the thirty years. The monthly payment on the loan will be $997.95. The cost of those payments is 360 times $997.95. Therefore, you actually pay $389,262.00 for the house, not $180,000.
Keep thousands of dollars for your b
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