Some have called compound interest the unofficial 8th wonder of the world. It is definitely a wonder when it is applied to your financial life. The best part about compound interest is that it allows for exponential growth of a portfolio. The concept is simple. When you earn interest/dividends/capital gains, you reinvest them into your portfolio instead of withdrawing the funds. The video shows just how powerful compound interest can be in increasing your wealth over time.
The other day I was sitting in a conference room with some coworkers. Our company was restructuring it’s retirement plan for employees. After the changes were announced, general conversation started taking place. The financial recession of 2007 through 2009 came up. One employee joked how he lost over $3,000 in the market downturn. While it isn’t a large sum of money, it was enough of a loss for him to take his money out of stocks and place it in bonds. He has had it in bonds ever since.
It is often said that losing money is more painful than gaining or winning money. It is human nature for us to make rash decisions when our livelihood is being threatened. And yes losing retirement money does effect one’s future quality of life and thus his or her livelihood.
My fellow coworker got too emotional during a time when he shouldn’t have. When the market goes down, we hear “SELL, SELL, SELL”. And when it goes up, “BUY, BUY, BUY”. Don’t watch the news, don’t watch CNBC and their stock reports, and please don’t get emotional. Investing consistently over time is the best way to ensure that you invest during dips and spikes in the stock market. Right now the market is currently down about 6% from it’s all time high. I consider that 6% a sort of holiday discount that we should all be benefiting from.
As you might or might not be aware of, the US Stock Market has been declining and may continue to do so. The market fell over 5% last week and looks to possibly continue the negative trajectory today.
This is the first 10% + pullback we have seen in a while. 10% is what experts call the correction, or when they feel stocks have gone up so much that they need to be corrected to allow new buyers to enter the market. Markets will always continue to rise over a long-term horizon; however, these pullbacks that occur do cause fear and worry in the eyes of many investors. I am here to tell you that you should not worry.
In one of my favorite books, Simple Wealth, Inevitable Wealth, by Nick Murray, Nick talks about how a declining market is one of the best things for your portfolio. If you buy an index fund on a constant basis, then putting the same amount of money into that fund will yield a purchase of more shares of that fund. Reversely, the more the fund increases the less shares you can purchase with the same amount.
My 3 tips for a downturn in the market:
Continue buying stocks. Just because stocks are going down doesn’t mean you should get out of them. That is what everyone else is doing. Cover the purchase of a range of stocks through an all-stock index fund.
If you have extra funds, then put them to work. If you have any spare cash lying around and your financial life is in good health, then use this as an opportunity to enter extra funds into a down market. Investing in an all-stock index fund means that the price of that fund is decreasing right now, so investing extra amounts of money at a decreased price means you can take advantage of that discount.
DON’T PANIC. Don’t watch the news, don’t follow the markets, whatever it takes, don’t panic. That is what many do during a downturn, they sell. Can the market potentially drop an additional 10%? Absolutely, there is no way to tell how far it will drop, but if you sell when everyone else is you are giving in to the panic. Be a disciplined investor and continue buying while prices are falling.
Want to invest like a genius? It is actually quite simple. Very few have been able to accumulate wealth overnight; however, many have built wealth over their lifetime.
Ever heard of Warren Buffett? I’m sure you have. He’s preached this advice before and continues to recommend it to the average investor. Another genius investor and entrepreneur… Jack Bogle pitches the same advice as Buffett. Jack is the founder of Vanguard, which offers low-cost investment options for the average consumer. Buffett, Bogle, and Charlie Munger all agree on your best bet for investing in your future.
If yes, listen up. There is a way to allow that 2, 3 or 4% your employer gives you to add enormous amounts of wealth to your pocket.
There is a thing called lifestyle inflation which ultimately means the more you make the more you spend. It is human nature for us to increase our standard of living as our income goes up. For instance, when I was in college, I rarely went out for a nice sit down meal. Now, I go a few times a month. Lifestyle inflation is bound to happen to a certain degree. You make more money, you start a family. You start a family, you need a bigger house. It isn’t a perfect cause and effect relationship but you get the gist.
So what are you doing with your annual raise this year? If you are like most employees then you get a tiny piece of satisfaction out of seeing a slight bump in your paycheck. Not like an extra $30, $50 or $70 a paycheck makes a huge difference, but it can if it is put in the right place.
Let’s say you are the recipient of a 3% annual raise from your employer. Instead of letting the raise go straight into your paycheck take 2% of that raise and increase your 401k contribution by 2%. Then let the 1% add a little more to your paycheck. Now on an individual with a $50,000 a year salary, increasing your 401k contribution by 2% is only $1000. However, if you let that money compound and you continue to put your raise into your 401k each year, then over time it can add up to thousands if not hundreds of thousands of dollars.
Nobody ever looks back and says “I saved too much money.” So give it a shot, and let the savings pile up.
In case you missed it the DOW jumped 236 points yesterday. The S&P was also up over 1% yesterday. Before yesterday’s rebound the market had pulled back approximately 2.5%.
While these numbers might seem minuscule in the big picture of things, there is an important message to take from this.
The market moves every day. Sometimes by a little, and sometimes by a lot. If you take the emotion out of your investing the daily, weekly or even monthly moves of the market shouldn’t be an issue to your portfolio.
Every Friday I put a $100 deposit into my brokerage account. Every month I put $500 into my Roth IRA. By investing on a constant schedule I can ensure myself DCA (Dollar Cost Averaging). By doing this, when the market goes up I am investing the same amount as I would when the market goes down. The only difference is that when the market is down for the week or month, I buy more shares of the mutual fund.
By sticking to my investment plan and constantly investing, I have little care for how the market swings each day, week or month. Timing the market is never a good idea. Very few have the ability to beat the market.
My advice: Keep it simple. Constantly invest the same amount each month into a mutual fund, stock, etc. Allow compound interest to accrue. Give it time.
This isn’t your usual school quiz where you impact a grade in a class. No, it is way more important than that! This is a money quiz that will impact many years of your life. Can you pass it?
Okay, so there really isn’t a pass or fail option. It is more of an analysis. If you can answer with solid answers to 7 of the 10 questions then I’ll give you a passing grade. Take the quiz and see how you fair:
Having a company 401k is a beautiful thing. A company match is the biggest way to get a free return on your retirement savings. But don’t let a company sponsored retirement plan be the end all be all to your future savings. When it comes to your financial future, I’m a big believer in having multiple sources. IRA’s, taxable brokerage accounts, real estate. There are many ways you can put your money to work.
Working at a company for 40 years and having a retirement plan coupled with social security might lead to a decent retirement future. Decent is not what I’m seeking and neither should you. You need your company retirement savings plan, but you also need an IRA, and other investments to fund an excellent life during your golden years.
The following article presents additional ways to save for those future years. It is possible to save too little, but you can never save too much. Check out ways to expand your retirement portfolio and ensure you make the choices now for a great financial future.
The power of compounding interest is a magical tool. Your growth potential is exponential. Nowadays, we are living longer than ever before. With longer life spans, we now have more time than ever to watch are money grow. When it comes to compound interest, time is key.
I first started investing with a broker and dividends from my portfolio holdings would just be placed into a cash account where I would eventually buy something else when enough money accumulated. Now, I index invest, and all of my dividends and earnings are automatically invested into my holdings.
I invested with a broker for two years. That time I lost on allowing my money to compound might not seem like much, but it will eventually equate to the loss of thousands down the road. Let your money compound and live off of your interest in retirement; until then, let it be.
The shifting retirement landscape has come to the point where companies rarely offer pensions for employees anymore. Instead, 401k plans are the preferred choice. Contributing to your employer-sponsored 401k plan to get the full company match is a given. If they contribute 50 cents on the dollar for the first 6% then you put in 6% of your paycheck and the employer contributes 3%. A total of 9%. Not too shabby.
Contrary to many news outlets, companies are handing out raises to employees. It could be in the form of an annual 3% raise. A promotion can often times carry a raise of 6% to 20%. No matter how big or small the raise is, you SHOULD consider raising your 401k contribution beyond the full company match.
It is the end of your company’s fiscal year and they award you a 3% raise (this is how employers make sure their employee salaries keep up with inflation). Let’s say you contribute 6% of your paycheck and the employer matches you 3%. You have a total of 9% of your paycheck being contributed to your 401k. If you make $5000 a month this equates to a monthly contribution of $450. If you were to take your 3% raise, increase your 401k contribution by 2%, a total of 8% that YOU are contributing, and add in your employer’s match of 3%, you now have a total of 11% of your paycheck going to your 401k. Now, instead of having $450 a month deposited into your retirement account, the amount leaps up to $550 a month.
Adding 2% of the 3% raise to your 401k contribution still leaves you a little, 1%, increase to your paycheck. You won’t miss the 2%. Why? Because you have already been conditioned to get by on the money you were currently earning.
Small raises to your 401k contribution can pay dividends later in your retirement life. The following link shows you just how much a small increase now can pay you much more in your retirement years.