Category: finance

Financial Fool. I am.  Are you?

Without sounding like an all out advertising for Motley Fool, I’m a big fan. Somehow, I stumbled across them back in 1999. maybe even earlier, 1996.  I don’t remember exactly.  Then, I read a couple of their books which are both great learning tools and entertaining.  I wanted to highlight one of their older Articles that is buried in their archives and not even viewable in my browser.

Retire on $125,000

Basically, the premise is this.

Your money will double every seven years if it compounds at the stock market’s average return of nearly 11% annualized over its lifetime.

Now, I know during these bear markets and the worst recession since the great depression, 11% return is unheard of.  The key here is over its lifetime.  Long Term. Not now.

The idea is if you can save $125,000 by the time you are 40, then you can theoretically stop saving, although I wouldn’t recommend it.

Why?  The power of compound interest.  The more money you save, the more money is compounded over a longer period of time which then allows you to get a good return.  Now, How do you get a 11% return?  Well, the stock market averages that return, then you add in if you save 10% of your income every year.  You’ll easily be able to get an 11% return.

Let’s look at a table for this double your money every 7 years.

Now, if you are like me, and you look at this and see age 19, $15,000 saved? Are you kidding me? I’m a college student and I have student loan debt bigger than that.  I totally understand you.  I think its very difficult for someone who is 19 to have that much saved.  However, I think it is very reasonable to think that by the time you are 40, you can save $125,000.  Think about it.  That’s 21 years, or roughly $6,000/year.  Now, you might think that is still unreachable.  Let’s calculate it.  If you started at $30,000/year income at age 22, and receive average 5% increases (some years will be less than that, some years will be more) in salary for 18 years, here’s how your savings could look:

Now that looks feasible.  I know 14% is aggressive.  I am not including in this calculation any compound interest gains from the stock market.  So, if you were to save only 10% a year and invest it.  You’d get more money.  Still, then we theoretically could stop saving for retirement, because if we left our money in the stock market from age 40 to age 61, we’d be millionaires.

Can I do that?  I think I can.  Can you do that?  I think you can.

Catch 22: describing a set of rules, regulations or procedures, or situation which presents the illusion of choice while preventing any real choice. source: wikipedia.org

Before we get to the Government Budget Catch 22, let’s talk Aesop.

One of Aesop’s fables: The Ant and the Grasshopper teaches the moral of hardwork and saving our food during the summer feast-time to support ourselves during the winter famine time.

Now let’s apply this moral to our Personal Finances.  Personal Finance experts everywhere all recommend to pay yourself 10% first at the very least.  In other words, if you make $1000 for that week, you should save $100 into an account for either emergency purposes or wealth creation.  So, during the economic boom-time (Summer growth), you’ll grow your savings.  When the inevitable recession cycle hits the economy (Winter famine) and your income slows or worse you lose your income, you can use your emergency fund to live comfortably while you wait for the next summer growing season or economic recovery.

It’s great, but many Americans have not practiced this fable, and consequently, have instead of saving during the feast of the recent economic bubbles, been spending even more money than they had.

How does this apply to government budgets?

Continue reading Government Budget Catch 22