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Visualize your best possible life
Most people can visualize what money can do for them in the future, yet they won't follow the basic yet very important financial principles necessary to increase their personal wealth.
Aristotle said, "Money is a guarantee that we may have what we want in the future." You may want to send your children to college or university, need to care for your parents during your retirement, or prefer to live in a better neighbourhood. You may want to travel, take up the piano, or purchase season's tickets to the symphony. These are not selfish desires. Before we can feel strongly about financial planning, we must visualize what money can accomplish.
Creating wealth is based on mathematical formulas
Money invested over time at a good rate of return creates and further increases wealth. Time is your greatest ally because it allows your investment to compound. Money creates money. The longer the interval invested, the greater your potential wealth.
Lump-sum investment
If a person aged 25 makes a one-time investment of $10,000 in a mutual fund earning an average rate of return of 8% over a 40-year period, he or she will have $218,226 at age 65. If that person waits until age 45 to invest the same $10,000, he or she will have only $46,820. You can see the importance of investing early.
Annual investment
By investing $2,500 per year, a 25-year-old earning the same average rate of return of 8% would have $650,565 in 40 years; the same amount invested at age 45 would yield $114,921 in 20 years.
What can the late starter do now to catch up?
The only options are to increase either the amount invested or the rate of return. The individual cannot control the future rate of return, so the best and most conservative course is to increase the amount invested. To achieve millionaire status at age 65, the 45-year-old will need to invest $22,000 at 8% over each of the remaining 20 years.
Get time on your side
Many middle-aged people procrastinate for years after acknowledging the need to save for retirement. They continue to spend their money on a bigger house, better cars, and educating the children. If you have fallen behind, maximize your RRSP by taking advantage of unused RRSP contribution room. Regardless of your age, maximize your potential to become financially independent. Develop a plan and take action today.
The rule of 72
The rule of 72 tells us that the number of years it takes to double your money is equal to 72 divided by the average annual rate of return. For example, if your rate of return is 8%, it would take nine years to double your money (72/8=9), and if the rate of return were 6%, it would take twelve years to double your money.
Note: The rates of return in all of the examples discussed above were used to illustrate the effects of compound growth and in no way are intended to reflect future gains or values of returns on investments in mutual funds or segregated funds. For simplicity, it was assumed that the money compounded without taxation and that investments were made at the beginning of each year.
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