Thursday, November 15, 2012

Road Blocks to Creating Wealth

Do you have a substantial amount in savings, but lack confidence and knowledge when it comes to investing? This blogs for you!

As a Generation X , 90% of Gen X (those born between 1965 – 1982) are saving in their retirement plans at work, but only 15% said they knew they were on track to create the income they would need down the road, when they can’t or don’t want to work full time any more. If you are between 30 and 44, most of you have plenty of time to make a plan and create a way to monitor your progress. If you don’t have an end goal in mind, it is difficult to know if you are on track or not.

I often see young people come into my office that are saving appropriately, but their investment allocation is much too conservative to have their dollars working to help them grow their income account over time.

Have you heard of the “rule of 72”? It is basic financial concept that illustrates how many years it will take to double your money.¹ Let me give you a hypothetical example. Let’s say you are 30 years old, you have saved $50,000 and it’s earning 2%. By the time you are 66, the $50,000 would grow to $100,000 (72 divided by 2=36).

Let’s assume you invested in a diversified portfolio (small, medium, large companies around the world and some bonds in a hypothetical portfolio that we assume you average 7% rate of return. Now, according to the rule of 72, your money doubles about every 10 years. In dollars, you would have accumulated over $500,000 in the same 36 years. This of course is just a hypothetical example. My point is how you diversify your investment may have a huge impact on your future income. It could be the difference of $4,000 per year in retirement vs. $20,000 from the same starting point.

If this makes sense to you but you’re not sure how to apply it to your own personal situation, take the time to meet with an advisor or take a class on investing. Maybe start a group of other like minded friends and do an investment work club and ask an advisor to come in and facilitate to make sure you understand the why’s and how’s of what you’re doing in your 401k and other investments.

¹ 72 is divided by the interest percentage per period to obtain the approximate number of periods required to double the investment.

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