Reaching Your Financial Goals
Last week we reported that a major financial company has recommend a savings goal of 10 times annual salary by the age of 67. Now people want to know how an average family making $60,000 per year can possibly save 10 times that, or $600,000.
The key is to break down the savings goal into realistic components and tackle them one at a time.
First you should own your own home, because then you can turn rent money into home equity. Yes, we know there was a bubble in home prices, but that is mostly behind us. So if you are making $60,000 per year and own a $240,000 home, you can pay it off over time and be a long way toward to your $600,000 goal. Further, home values should keep pace with inflation so that the home will retain its value.
Secondly, you should look for investment opportunities where you have a special measure of control. A good example would be investing in your small business (Just not all of your funds). Or, if your employer matches your 401(K) contributions, you would make an immediate doubling in your investment by joining the 401(K) program. Another example would be Universal Life Insurance products, which can provide protection for your family while building up a cash nest egg.
Thirdly, you need to know what you are investing in. Look into the stock market, which has produced 6% yields on an historic basis. You can even buy mutual funds so an expert can pick good companies. But watch out when the price earnings (P/E) ratio exceeds 16 (It was about 35 in the2000 crash and 30 in 2008 crash), because the market is overvalued and may crash. The P/E ratio, published daily in the Wall Street Journal, is now at 18, a little above the average of 16, based on anticipated economic growth from tax and regulatory relief. If these things happen, you should expect normal (6%) yields as long as corporate earnings hold steady. Our hero Abraham Lincoln, who did legal work for railroads, stuck with what he knew by investing in railroad bonds after he bought his home. Knowledge will not insure you from losses, but it will increase your chances of success.
Fourth, remember the miracle of compound interest. Saving $100 a month for 30 years at a 6% yield will produce $100,000 in savings. So, to have the other $360,000 beyond a $240,000 home needed for the $600,000 savings target, a monthly savings of $360 (about 7%) would be enough. We recommend a 10% savings rate, which will about double your savings every 12 years at a 6% yield. So don’t wait to start saving, because time is the key to the miracle of compound interest.
Financial Freedom is an attainable goal for everyone with a little knowledge and a little time.