Saving vs Investing? People ask this question often.
Over 50 years, a drop from 10% to 9% reduces cumulative growth on $100,000 by $4.3 million or 43 times your investment.
That may surprise you, but it shouldn’t. It doesn’t take very much to see a dramatic change in your investments. And, if this is money that you are relying on for retirement, then it could also affect your lifestyle.
Everyone should have two components to their financial plan for generating future cash flow:
How much money to keep in savings vs investing
Save money – six months of your fixed spending (rent, utilities, food, etc.)
Invest the rest of your savings
Confused? Savings is not the same as investing…although most advisers will not make that distinction. What you may be told to look at is interest rates – not dollars and sense…errr cents. If your investments are earning 10%, calculate the fees you are being charged. Don’t assume that because the management fee is .5% that that is all you are being charged. It isn’t. What is the 12b-1 fee? Look at the total expense ratio. Subtract that from your interest earnings.
Most people find that 10% gross only yields an 8% net.
On the savings side…you don’t need to squirm when it comes to lower interest rates. To save money is really to preserve the value of what you have. So, the goals are a bit different.
The main purpose of having both savings and investments is that by nature most investments involve more uncertainty about future earnings. Savings are often associated with preserving what you have (making the most of what ya got). A good balance between the two means that you should have money when you need it. Before retirement (savings) and long-term capital appreciation (investments).
Unless You’re Rich, There Are Some Investments You’ll Never See
Accredited Investors are sanctioned by the SEC and defined by the IRS. Being “accredited” simply means that, in the eyes of the Securities and Exchange Commission, you are special. Thus entitled to investments that the layperson is not. This special rule, otherwise known as “Regulation D” is something of a mystery for most people.
What does all this mean for you in deciding about Saving vs Investing? Nothing, unless you have a net worth of at least $1 million. If not, then you’ll have to poke and prod your way through garden variety mutual funds and accept lower rates of return on your investments.
Of course, being an accredited investor is not the only way to become wealthy. You could learn how to invest in stocks, and that would be much better than a mutual fund. Less risky than a hedge fund. Warren Buffet never needed anything but stocks to get started…and neither do you.
Are You Making The Same Mistakes As Your Parents?
Most people believe that senior citizens are among the savviest and financially intelligent people among us. Do you believe that too?
As a result, children (as they get older) listen to the advice handed down by their parents. Some of it is good advice.
Much of it is outdated. Today, we are seeing the results of bad financial planning:
The number of bankruptcies among youngsters is actually down, not up. This may seem shocking that bankruptcies for individuals over 55 is up 40% and for individuals over 75 – a whopping 433.3%!
Obviously something isn’t right with this picture. Maybe it’s time to consider a different approach to financial planning…
The consolidation of debt may be the first step…but it should not be the last. In fact, it might help if you didn’t dig yourself into a hole in the first place.
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