Getting a Real Savings Started (Day 6: Long Term Investing)
Once you have a starter emergency fund in place and are building 3-6 months emergency fund, it’s time to start looking at long term investing. Your 3-6 month fund amount is still considered short term savings even though it may ten or twenty thousand dollars. It is equivalent to the cost of paying all your bills for 3-6 months. So, if there were a loss in income, you would have the relief of knowing you have a space of time to replace your income and still pay your bills in the interim.
If your company offers a matching contribution program (401K, TSP), max it out. This is your first means of long-term savings. That money is being set aside and matched by your employer to help fund your retirement. When you borrow from your retirement savings you are almost always required to pay it back with penalties and interest. That servers a deterrent from bothering it.
Any other investment products you chose is a personal choice and is a major element in a wealth minded person’s portfolio. Albert Einstein called compound interest the eight wonder of the world. When I heard his Rule of 72, it blew my mind. Basically, it tells you about how many years it would take for your investment to double. Take the Interest rate of return and divide it into 72 and that will give you the number of years until it doubles. Let’s say you received a tax refund of $5k and decided to save it for 36 years until you retire. How you chose to save it is the difference between night and day.
And this is the possibility of just a one-time deposit! What if you invested every year or every month over the course of decades? What if you started an investment for your young children now or taught your teens this rule and helped them get started.
The reality is, if you keep living, one day you will reach retirement age. How you save and plan is the difference between you having to continue working until you are 70 or 80, having to return back to work after you retired a few years because you ran out of money or can’t make ends meet, or living comfortably. Preparation is the key.
An investment specialist would help determine your risk profile and assist you with setting up something that suits your profile. Reconsider hiding your long term savings around your house to draw 0% interest, or putting it in a bank to draw .5 to 1%. Did you know when your money sits in the bank, the bank get the benefit of compound interest that you are not using?
The sooner you get started the better. I wish every 20-year old knew this rule and took advantage of the value of time. But, even if you’re in your fifties like me, you can still take advantage of this. A lot of people are living to 80, 90, 100 years old. Only God knows, we might have another 40 or 50 years in front of us. It’s never to late to learn to do things better. You may be more conservative that the 20 year old, but age is no reason to opt out altogether. Getting started can be simple; consult a licensed investment professional.
Rule of 72: Scenario of $5,000 (5K) over 36 years
