Monday, March 26, 2018

Financial Serenity Month - Chapter 4

This is the last post in the Financial Serenity Month. We have been talking about retirement planning. Before we conclude this month's theme, I would like to underline the fact that financial serenity does not have to happen at the "traditional retirement age" - it is exclusively about the ability to live according to one's wishes and standards without having to work; that is, you don't have to work in order to generate the income you need. Retirement planning is discussed in this context because that means you only work if you choose to, and not because you have to.

And if I have convinced you to start setting money aside, you may now start worrying where that money is going to go. The main objective is for the money you set aside to come back to you with friends – the more, the better. And in order for that to happen, you cannot leave it parked in a savings account. Nothing against banks, they are just not a great vehicle for increasing your net worth through savings; not with an interest rate pretty close to 0%. 

The type of investment and the company, as well as the status (qualified funds versus non-qualified funds), will depend on your needs, risk tolerance and when you need to have access to the money. All investments should be personalized for you. Therefore, either you are an expert, become an expert, or hire an expert to help you. 

The one sure way to figure out which investment will bring you the most money is using the Rule of 72. This will show you how many years it will take for your investment to double. No matter the amount you invest, don’t you want to know how long it would take for your money to double? To find this out, you would take the interest rate you receive and divide it into 72. This number signifies the number of years it would take you before your money doubles without your adding anything extra. For a 1% interest it takes 72 years to double the money you deposit – let’s not even look at under 1% (which is what you get from your regular savings account at the bank). For an 8% interest rate – the average growth of the market – it would take your money 9 years to double. Would you rather wait almost a lifetime, or would you like to double it in 9 years?

Now that you understand why it is important to have a plan to exit your business into retirement, you are ready to set a system in place. And the best thing to do is to make saving for retirement a priority. If you ever heard any financial experts talk about saving money, you are probably familiar with the phrase “pay yourself first”. There is no better recipe for retirement. Whether you can direct 10% of your income towards retirement, or you need to start with a smaller amount, it is always best to start. As you get into the habit of saving, you will find it easier and more rewarding. If you struggle in the beginning and are afraid you might run out of money for current expenses, don’t worry: you are not alone.

You will find creative ways to take care of current needs as soon as you have the system in place to redirect the money from current expenses to future serenity. Since not everyone has the discipline to set money aside for retirement on a regular basis, the best thing to do is to automate it – a set date, maybe a set amount. You can always change and adjust, you only need a starting point. And remember, you can always count on help from a financial professional if you lack the knowledge, the will or the discipline to follow through.

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