When we're young, we simply need to substitute most of the dollars we pay in servicing our debts (excessive student loans, credit card loans, auto loans) with dollars that we can save and invest for the long haul. That means delayed purchases and perhaps some we don't ever make.
Because in order to save and invest, we first need some money.
In order to save money, of course, we need a paycheck. And by earning a solid education, we can help ourselves make that paycheck a substantial one.
After that, we need to set aside a portion of that paycheck in the form of savings. Next we invest those savings in blue chip stocks for the long haul. That will create wealth well beyond our dreams and expectations.
401(k) contributions aren't taxed when earned. Thus, assuming for the sake of simplicity a marginal income tax rate of 25% (state and federal combined), $1 of each $4 contributed to our 401(k) isn't then taxed. We keep that money and invest it for our long term financial needs. In addition to the $1 government 'loan,' the other $3 is invested as well, and the initial $4 savings and investment will grow to a total ~$128 over 45 years, assuming an average annual rate of return of 8%. And if there are company matching funds available to help the individual investor's 401(k) balance grow, that $3 (net of avoided taxes) initial investment will grow to ~$256.
So why doesn't everybody participate to the fullest extent possible in this very simple and effective wealth creation formula? Beats me.
1 in 10 American workers not saving for retirement says this in part:
"One in 10 American workers isn't saving for retirement . . . and their numbers are increasing, even though the economy has improved. . . .
A persistent concern among many Americans is whether they'll be able to retire. . . . And retirement researchers have pointed out that the decline of pension programs, the anticipated increase in medical expenses and a rising cost of living could make retirement more of a privilege than an expectation in the future.
The National Institute on Retirement Security reported in July that Americans in almost every state won't meet their financial needs in retirement. In a separate report, the group estimated that the median retirement account balance for all households near retirement was $14,500. For all households, it was a meager $2,500. . . .
- The youngest age group in the survey, adults age 18 to 29, was the most likely not to be contributing to a retirement fund. . . .
- Financial planners agree that saving sooner is the key because the money will compound over a longer time period, resulting in a bigger nest egg.
- For example, an investor who puts away $5,000 a year from age 25 to 65 at a compounded rate of 8% will amass almost $1.3 million over those 40 years, says Gilbert Armour, a financial planner with SagePoint Financial. "Their friend, who procrastinates and starts 10 years later and has only 30 years, will reach $566,416 at age 65 -- less than half of their forward-thinking friend," he says."
For those who may be thinking that saving anything is impossible, consider the following simple example in How My Mother Turned $8 into a million:
"In 1969, my mother landed in New York with $8, a suitcase, and the sari on her back. She left India after receiving a scholarship to the physical-therapy program in Warm Springs, Ga. The fact that she left familiar surroundings for an unknown world was remarkable. But even more remarkable were the simple lessons on money that made her a millionaire and will impact our family for generations.
My parents were part of a community that followed two principles on money:
1) Avoid things you don’t understand.
2) Spend less than you make.
As an immigrant, the first principle eliminated most financial products. In their early years, my parents simply didn’t understand credit, insurance or investing. . . .
My mother was the model of saving. At restaurants, she ordered water, lemons and sugar instead of the $2 lemonade. . . . In fact, every expense she made was filtered for how she could spend less. It was second nature. It was her way of life. It was done in a way that didn’t deprive the family. And it significantly reduced her financial stress.
By following principle No. 2, my mom had a foolproof plan where she was in complete control. She wasn’t dependent on market returns or a pending bonus for financial security. She didn’t lose sleep over her lack of financial knowledge because she was investing in herself. Sure, in hindsight, she didn’t maximize her portfolio, but that was far less important than the daily feeling of empowerment she gained from following the two principles. . . .
No matter what your broader financial strategy includes, you can all apply the two principles. You have the ability to spend less than you make. You can avoid things you don’t understand or take the time to learn them. You can develop a deeper relationship with your money that creates a burning desire to keep it. And in the process, you can pass down more than money. You can pass down the principles that protect that money for generations to come."
The frugal and smart lady from India turned $8 into $1 million by spending less than she earned. And $1 million is a whole lot more than the $14,500 median 'piggy bank' for households with soon-to-be retirees.
And had that same frugal and smart lady been taught the basics of investing in blue chip stocks for the long haul, the $8 that became $1 million would have ended up being several million dollars more.
In any event, the basics are not difficult to learn and apply, and long term wealth creation isn't difficult.
But a lifetime habit of living from paycheck to paycheck and spending more than you earn by borrowing won't make it happen.
Following the simple formula of regular savings + investing in blue chip stocks = long term wealth creation is a dream fulfiller.
It's intended for those interested in having plenty of money for the use of themselves and their families in both the short term and over the long haul as well.
If you can dream it, you can do it. But it's the doing that counts the most.
That's my take.