How to Grow Rich Slowly


Everyone has seen the late night advertisements.   There is a guy standing in a large backyard by a sky-blue pool with tropical flowers and a large stucco-roofed house in the background.  Perhaps he has a woman 10-20 years younger than him lounging next to him in a bikini, enjoying the sunny day.  They are both probably wearing sun glasses – wealthy people are always wearing sunglasses.  He says that he is ready to share the secrets to building great wealth and obtaining economic freedom.

He then proceeds to tell you that you can make a fortune while you keep your day job using his system.  It may be a real estate trading scheme.  You may be buying and selling penny stocks.  Perhaps you are doing multi-level marketing — a technique only a hair different from a pyramid scheme.  Maybe you are selling products over the internet for them.  All you need to do is set up an account and then check each day to see how much cash you made.  Just sign up for their seminar, which conveniently is coming to the Holiday Inn near you.  The price is never mentioned.

Unfortunately, wealth will not come to you from some scheme.  If there really were a scheme that could create untold wealth, why would they share it with you?  Why not just sell the real estate themselves?  Why wouldn’t they set up their own websites to sell their products?  If the individuals in the commercials actually are wealthy (and they didn’t just rent out a house for the commercial), you can bet that they got that way off of the fees for their seminars and classes, not from the scheme they are presenting.

 

The Compound Effect

Getting wealthy through starting a business, which is the fastest way, requires time, risk taking,  hard work and long hours.  Getting rich through investing luckily doesn’t require as much hard work, but it requires sacrifice,  prudent risk taking,  time, and discipline.

Sacrifice is required.  You don’t buy a new car every few years; you buy a 3-4 year-old car every 5-8 years.  You don’t buy a boat; you rent one during the few occasions you actually go boating during the year.  You don’t eat out every night; you learn to cook and eat out perhaps once a week.  You set a budget and stick to it, and that budget has less money going out each month than is coming in from your job.  You understand that by waiting and buying the toys later for cash and from the gains from your assets, you can have both the money and the toys.  Buy them now, on credit, and you’ll end up spending twice as much for them as the sticker price.  Plus in five years, they’ll be old and broken and you’ll still be making the payments!

You take prudent risks.  This does not mean going to Vegas and betting on red.  It means investing your money in places where the odds are in your favor, but that grow faster than the rate of inflation.  Things like stocks, real estate, ETFs, mutual funds, and bonds.  These investments allow your money to earn money and compound, growing as you work so that eventually your portfolio is providing more income than your job.  This is when things really start to happen.

 

For more information on why you can have too much diversification, try one of these great books:

        

Growing wealthy requires time.  Do some calculations on compound interest and you will find that very little interest is made in the first few periods, but huge amounts are made during the last few.  Try this experiment: start by placing a penny in a jar.  The next day place two pennies, the next day four pennies, and so on, doubling the amount each day.  See how much you will be putting in the jar by the end of thirty days.  (If anyone does this, please write a comment telling everyone what happened).  Be patient and let your money compound.

Finally, discipline is required.  Money needs to be put away every month into investments.  It doesn’t matter if the market is up or down, put some money away.  If the market falls through the floor, buy all you can.  If the market seems really pricey, perhaps hold back a bit on the side in a money market account, but put some in anyway in case you are wrong.  In any case save some money each month from you earnings.  Consistency is the key.

Learn how to use mutual funds from the founder of Vanguard:

 

 

 

 

 

 

 

Join the conversation and help make this blog more exciting!  Please leave a comment.  Also, if you have an investing question, email  vtsioriginal@yahoo.com or leave the question in a comment.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

How to Figure Out How Much You Need to Retire


Early on, when we first started planning for financial independence, one of the first things we needed to determine was how much we would need to accumulate to retire and maintain our standard of living.  Having read a few books and newspaper articles, it appeared that the research suggests that you can withdraw about 3-4% of your portfolio value per year to use for living expenses without ever depleting the value of your account.  This figure includes allowance for inflation, since the idea is that you earn 8% or so on your portfolio (on average, assuming a mix of bonds and stocks), so your portfolio value (in dollar terms) will increase 4-5% each year over your retirement.  This means that in 15 years your portfolio will be twice as large as it was when you retired, and therefore able to provide twice the income in dollar terms, to make up for each dollar only buying half as much.

Determining how much you’ll need for retirement once you know you can withdraw 3-4% per year is really fairly straightforward. You simply figure out how much you’ll need in the way of yearly income during retirement, then multiply that by twenty-five. This assumes that you’ll withdraw the maximum of 4% from your retirement account each year, which will be invested in an appropriate mix of mutual funds and cash. If you want to be a bit safer, multiply by thirty-three, which will assume you’ll only withdraw 3% per year. This will increase your odds of outliving your money and accounts for stocks and bonds perhaps earning less per year than expected in the future – something economists keep predicting will happen and very well might if the government keeps growing and imposing all sorts of wasteful and protectionist regulations.

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For many people, something around a million dollars is reasonable, which provides an income of about $40,000 per year. If you have paid off your home and your cars, such that all you need to buy is food, clothing, and utilities, that is fairly reasonable. You will also probably want to save an additional $150,000, or $300,000 for a couple, to pay for medical expenses in retirement. So that puts minimum retirement savings at about $1.3 M. To be more conservative, shoot for something around $1.5 M.

 

So, the formula would be:

Minimum Retirement Savings = (Income Needed)*(25 or 33) + $300,000

for a married couple. For a single it would be:

Minimum Retirement Savings = (Income Needed)*(25 or 33) + $150,000


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This all assumes that you have paid off your debts and all that you have are maintenance costs to keep and maintain your home, keep the lights on, and eat each day. Certainly that is the state you should be in before you retire and start living off of your savings. To really be ready for retirement, you should have done the following:

  1. Pay off all credit cards and start using debit cards and cash for everything. You can’t afford to be paying out credit card interest rates.
  2. Pay off your home and any other home equity loans and the like. You need to have the security of having your home free and clear so that it can’t be taken away.
  3. Pay off any car loans. You don’t want to be worrying about a car payment.
  4. Have a good plan for medical expenses, ideally with a back-up plan to Medicare. Hopefully Medicare will remain and help with your medical expenses, but it is good to have a back-up plan just in case benefits get cut, particularly with Medicare Part B plans that are a favorite target for cuts.
  5. Pay off your student loans. These should have gone away before you bought your first house. Don’t go into retirement with loans.
  6. Pay off student loans for kids and grandchildren that are in your name. You can’t afford to be paying off student loans for others while you’re in retirement. Get with your children and grandchildren and discuss how the loans can be paid in full before you enter retirement. Also, resist the urge to take out student loans for children after the age of about fifty-five. As extra incentive, let your children know that you’re coming to live with them should you run out of money.

Note also that this is the minimum amount of savings, and the more you save, the better your life in retirement will be. This is because extra money you have saved – that beyond the minimums – can be invested fully in things like stocks and real estate that will generate more income than the traditional cash-bond-stock portfolio that you would invest in if you just had the minimum. If you have just enough, you’d need to be conservative with your money, and thereby cut your income, because you could not afford to suffer a 40% market downturn as happens every decade or so. If you have extra money, you can have a portion of your portfolio invested in a conservative manner, then have the rest invested in equities and real estate. You can then use the extra income generated by those investments for things like travel and lifestyle.

 

 

 

 

 

 

Have a burning investing question you’d like answered?  Please send to vtsioriginal@yahoo.com or leave in a comment.

Follow on Twitter to get news about new articles.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Ten Things I Learned While Working for the Rich


I read a great article from Free Money Finance on the things he learned about how rich people handle money while working as a financial adviser to ultra-wealthy clients.   Basically the things you learn from The Millionaire Next Door hold true.  The wealthy people he met didn’t tend to drive fancy cars or wear expensive clothes.  He also found that they were very nice people who were involved in their churches and their communities, not the evil, arrogant, elitist folks the stereotypes would have you believe.   Check out the full article here.

 

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Have a burning investing question you’d like answered?  Please send to vtsioriginal@yahoo.com or leave in a comment.

Follow on Twitter to get news about new articles.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.