What is the most important financial decision I can make?Another thought provoking article by Ernie McDaniel - as seen in Forum News. |
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For members of the X and Y generations, the decision to remain unmarried, and most certainly the decision not to have children, may be the most positive financial choices you can make. Just kidding! Sort of… A more serious answer, and one that applies to all age-groups, has to do with interest - whether you earn it or pay it. So guess, which is better?
If you are of any generation but Senior, it's statistically likely that you spend too much and save too little, also that you pay too much interest and earn too little interest. An action that anyone who has substantial debt may take to improve considerably his financial life is - yes, you guessed correctly - to pay off the debt as soon as possible, especially consumer debt (credit cards and cars, for example). Then, DON'T CREATE MORE! Instead, SAVE, SAVE, SAVE! Make interest work for you instead of against you! I am dead serious: this changes lives.
Forgive me for saying this but most people are abominably ignorant of both the dangers and opportunities of compound interest. And they are equally ignorant of how much wealth may be required to comfortably retire, accumulation for retirement being the primary goal of long-term savings for many people. So how much? Drum roll, please. Approximately 20-25 times the desired annual retirement income. For example, if you want retirement income from investments of $40,000, the wealth you might need to have built is $800,000 to $1,000,000.
Easier said than done, you may be thinking. But possible! How? Through application of the miracle of compound interest. Just give yourself thirty years of saving 10% of annual earned income and you may be able to meet realistic retirement goals without a problem. Hey, we're not talking about a huge sacrifice here, only a small and steady one. In fact, after a few years, your annual interest earned may be equal to your annual contribution to savings. And after a few more, it may be many times your annual contribution. Of course, this result may very much depend on what percentage return you earn along the way, but that gets into where to invest and how much potential growth to expect - another subject.
By the way, I'm not saying it's impossible to accomplish your goal in less time than 30 years, but it's more difficult and it may require you to commit much more than the suggested minimum savings of 10%. Want to retire in 20 years? Well then, save 30%. Make the miracle work for you sooner and faster.
When you're paying interest instead of earning it, or even worse, not paying that incurred, we are no longer talking about a miracle, we're talking black magic. We're talking about consummate evil. Imagine your voodoo doll likeness with one-hundred dollar bills pinned all over. So far so good. Then set the whole thing ablaze. And what individual, no other in the whole wide world, can do this to you? You. Ahem…unless you're married.
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