Why go through the trouble of saving money? Most of us have a natural inclination to spend it now and be immediately gratified rather than sock it away. It seems the siren song of the spendthrift has rarely been so alluring.
Deferring gratification may seem like a good strategy when the payoff is significant and palpable, but with currently low interest rates it hardly seems worth it.
There are three essential ways you can earn money in this world. For most of us, the primary source of income is our work. Others are lucky enough to generate an income by affiliation such as an inheritance, a trust fund or marriage.
Finally, we can have our money make money for us, and therein lies the path to financial independence. If we don’t make this shift during our lifetimes, we may never escape being forced to work to support our lifestyles.
For those just out of college, it’s natural to have a low level of savings. The wages from your first job may have seemed impressive on paper compared to the campus job, but once your paycheck is reduced by Social Security, Medicare and withholdings, you weren’t left with much. You may even question the value of savings in your 20s when your income is relatively low. Perhaps you should leave the 401(k) to those with a higher salary who are closer to retirement.
It’s in your 20s and 30s that you set the financial foundation for the rest of your life. That’s when you learn that living within your means is a necessary habit for enduring financial prosperity. The money you save in this period will have tremendous impact on your future finances, assuming you invest wisely.
Imagine your friend Emily is 25 and starts annually putting $5,000 in an investment portfolio. She keeps it up for just 10 years. She averages a modest 7 percent annual return on her portfolio. Meanwhile, Will just scrapes by during this time, but gets back on track at age 35 and for the next 30 years saves $5,000 a year, earning the same returns as Emily.
Who ends up with more: Emily, who has put aside a modest $50,000, or Will, who has set aside $150,000? While Will has amassed a decent portfolio at more than $505,000, Emily has beaten him handily at more than $562,000. It’s the magic of compounding returns.
What’s more, Emily has established a pattern of spending less than she earns that will enable her to be financially independent sooner than Will.
While working to support ourselves is necessary for much of our lives, it does come to an end for all of us. Wouldn’t you rather be financially independent, instead of waiting for an inheritance or needing to work for the rest of your life?
The Laid Back Portfolio had another solid quarter, helped by impressive performance in the bond market combined with a furious rally in the U.S. stock market over the last two weeks in June.
The Laid Back Portfolio does not use complex investment techniques, but will likely outperform most of its peers over time. It’s a simple 60 percent allocation into the S&P 500 and a 40 percent allocation in the BarCap US Aggregate Bond Index.
We use a 1 percent annualized fee deducted quarterly, which is relatively low when compared to mutual funds with sales commissions or higher loads, but can be easily beaten through investment in low fee, no-load funds or ETFs. Laid Back earned 0.7 percent for the quarter, leaving the portfolio up 4.19 percent for the year.
Dave Gardner, for the Daily Camera.