Planning for both your short term goals while being cognizant of your long term aspirations is really difficult to grasp especially when you’re unsure of what the future “budget” is or should look like. At InSight, our mission is to re-define the client advisor relationship and break away from how it was and unfortunately still is being done. Advisors in the past ask people what their goals are now without the client having an understanding of what is actually possible.
For example: If my goal is to save $500 a month because it’s what fits my income and budgetary restrictions do I actually know what this will amount to in the future? Or maybe you’re 35 and you’ve saved $100,000 which is incredible but what does that actually mean?
Without knowing how things like compounding, inflation, savings, and returns impact your long term goals most people don’t know how to answer the questions above which is why it’s so important to understand what is possible first so you can actually put together a plan.
So, let’s make up a client. Their name is Frances. Frances is single, 30 years old and makes $75,000 a year. They’ve saved $10,000 so far in their investment account that tracks the whole market and $20,000 in their 401(k) that is in a diversified portfolio her employer offered. Since they just paid off their debt they are going to be able to save at minimum 10% into a 401(k) and $5,000 into their savings account annually increasing with inflation (2.3%). Their employer matches 100% of their contribution up to 5% of their salary.
Quick Quiz – How much will Frances have in their investment account if they have $10,000 now and add $5,000 annually increasing with inflation in 30 years? What about in their 401(k) that has $20,000 in a diversified portfolio and they’re contributing 10% of their income each year increasing with inflation?
What is the value of France’s Investment Account?
A) $300,000
B) $250,000
C) $400,000
D) $800,000
What is the value of France’s 401(k)?
A) $450,000
B) $600,000
C) $535,000
D) $1,200,000
If you didn’t guess D for both questions then you may be underestimating the value of compounding. Now that you can see what is possible isn’t it a little bit easier to plan? For most of us, thinking about the long term is difficult to grasp. This is why it’s so important to sit down with a planner to see what’s possible then talk about building out the plan.
For most, knowing you could have over 2 million dollars when you’re 60 is a dream come true. Unfortunately, most people don’t have anywhere close to this and I think it’s because they didn’t know what was possible when they were young.
So whatever your goals are, the best thing you can start doing is saving early and as much as you can. Remember income – savings = expenses. Acquire debt that is accretive, helping you build your net worth, and pay off and stay away from erosive, or bad debt, like credit cards and car loans. Buy a used car instead.
If you have a goal, automate your savings and use a standard compounding calculator (lots of free ones online) to see, with a realistic rate of return, how much you need to start saving to get to your goal. If you need help schedule a consultation.
Check out our other articles on savings and buying a new home for more information!