Friday, July 3, 2015

Owing vs. Owning ... Becoming a Millionaire the 'Easy Way' .... Investing for the Long Haul

It's the 4th of July weekend. Happy Birthday, America.

As free citizens of the most prosperous and opportunity rich nation the world has ever known, We the People as a whole and as individuals are living examples of the 'If you can dream it, you can do it' way of life.

So here's my plan. For these next few days at least, let's try to forget all the crap that's going on all around us in the world and enjoy the weekend.

And as you reflect on all the wonderful things that have been part of your American life these next few days, please take the time to think about this one: Which is the better lifetime goal for you, your family and friends --- spending adulthood as a debtor or setting your sights on becoming a millionaire?

Because becoming a millionaire starts with not allowing yourself to become an unnecessarily big debtor --- it's the sure way to end up on 'Easy Street.'

And that journey to 'Easy Street' begins with completing a solid formal education and the avoidance of unnecessary student loans, staying away from onerous and multi-year auto loans for expensive cars, and eliminating month end credit card balances with their unconscionable ongoing 20%+ interest charges. Oh, and one more thing --- tell the kids not to start adulthood via a low money down payment on an expensive 'dream' house. They would be better advised to rent instead, at least for the first few years.

In other words, investing money instead of paying interest is a great way to start the ball rolling to becoming a 'millionaire.' Start by investing in a low cost index fund consisting of a variety of blue chip dividend paying stocks at an early age. And while doing so, avoid paying high fees to non-value adding money managers. This, combined with a consistent approach to saving and investing part of each paycheck, will do the job nicely over time. Especially if you don't hit the panic button and sell with the crowd when times get tough and the fit hits the shan in the stock market every few years.

Sound too good to be true? Well, it's not. In fact, it's not even all that hard to do. And it's worth the effort.

How to save $1 million in your 401(k) says this about the easy way to millionaire status:

"Got $1 million in your 401(k)? Some savers might be surprised how feasible that savings goal is if they put their mind — and their money — to it.

Of course, if you don’t have $1 million saved, you’re definitely not alone.

Just 0.42% of all 401(k) participants in the Employee Benefit Research Institute’s database had $1 million or more in their account at the end of 2013. EBRI’s data covers 26.4 million savers.

Similarly, just a tad more than 72,000 retirement savers, or 0.56% of the 13 million plan participants in its database, had $1 million or more in their 401(k) account at the end of 2014, according to Fidelity Investments’ analysis of the plans it manages.

Then there is the very worrisome data on the other side of the coin:
  • About 31% of Americans have no retirement savings and no pension, according to a recent study by Center for American Progress, citing data from the Board of Governors of the Federal Reserve System.
  • Most people who’ve saved some money haven’t saved much: Among households aged 55 to 65 who have retirement accounts, the median account balance was $104,000, according to the Center’s report.
But this story is aimed at those . . . who may not realize that a little focus on their retirement savings could get them to $1 million without too much trouble.

Having time on your side helps. Say you make $75,000, and enjoy a 3% pay raise every year. If you can get a 7% annual return on your money, plus your company gives you a 50% match on the first 6% you contribute to your 401(k) — a not-uncommon company match — then getting to $1 million requires contributing just 7.3% of your paycheck every year for 30 years . . . . Saving $1 million may not be easy. But for many Americans, it’s not impossible. It does, however, require a focus on current spending and future goals. . . .

That means thinking long and hard about where your money is going now, whether that’s the best use of your money or whether it makes more sense to stash that money away. . . .

Maybe you can’t contribute the annual maximum of $18,000 ($24,000 if you’re 50 or older) to your 401(k). That’s OK. . . .

If you’re in your 40s or 50s and thus with less time on your side, then you’ll have to figure out ways to squirrel away more. . . .

Don’t buy a new car. Eat out less. You get the picture. . . .

A $1 million retirement account “can generate an income of roughly $40,000 a year for many decades, and you can add in any Social Security or other pension income on top of that . . . .

The key is to take time now to think about your spending and make sure it matches your values....

Here’s another way to power your savings higher: Find ways to increase income, such as asking for a raise or finding an additional income source, such as a part-time job. Then funnel that money into your retirement-savings account.

Also, make sure you’re investing in low-cost index mutual funds. . . .

Active investors, market timers — they underperform the market . . . . It’s going to be a long haul. You’re not going to get to $1 million in five years just by investing in your 401(k)."

Summing Up

Dreaming precedes doing, but dreams do come true if we work long and hard enough to achieve them. Our Founders proved when declaring our independence as a nation 239 years ago.

However, the secret to reaching our goals, then as now, isn't in the dreaming. Instead it is in the doing.

One good practice for 'doers' is to refrain from making purchases financed by the seller on the basis of 'deferred or easy low monthly payments.' What we don't pay in interest is money we can invest for our future well being instead of the well being of our creditors.

Accordingly, pay yourself first. Contributing pre-tax income to a 401(k) or IRA tax advantaged plan is a whole lot better than paying creditors with after-tax income. And if a company match is part of the tax deferred and tax free compounding investment equation, then so much the better.

Simply put, avoiding needless debt at an early stage in adulthood is the best way to begin that 'dream' by establishing the habit of regularly saving and investing.

After a few years, the deferred 'free' spending can begin as the habit of consistently saving and investing will have been well established.

Have a happy and safe Independence Day weekend!

Thanks. Bob.

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