Financial Education
Financial independence requires money management
Research shows that individuals who have the ability to create their own financial independence always have two characteristics in common. First, they put themselves in a position where opportunities are presented to them; and second, they are also quick to take advantage of those opportunities. Few individuals create enough wealth to fund their retirement through a paycheck or, for that matter, through some windfall investment.
Real, sustainable financial freedom is created over time, using money management strategies that include the principles of compounding, deferral, cost-of-waiting, and time value of money.
Without saving, the odds are stacked against you
According to the U.S. Department of Labor, a mere 5% of individuals will create the wealth necessary to sustain their retirement. The key to building wealth is to start saving early. It takes $10,000 a year ($250,000) at age 40 to accumulate approximately $1 million by age 65. Beginning at age 24, it takes $2,000 a year ($82,000), and at 18 years old, it only takes $2,000 a year for 8 years ($16,000). The rest is accomplished through the compounding of interest. So as you can see, there is no substitute for starting a savings plan early.
Through compounding, financial freedom is just a matter of time
To illustrate this further, let's take a look at an example called "the penny trick": Joe received $500,000 at the end of the month of June. Tom was offered one penny on the first day of June. But Tom's penny would double each day for the entire month of June. Who is better off?
At first glance, it seems that $500,000 would be more advantageous. However, if you calculate it, you'll discover the pennies doubling each day would generate more than $5 million by the end of the month! If you use the month of February (28 days) instead of June (30 days), the amount would only be $1.35 million. This is the difference two days make. Use the month of December (31 days), and the amount grows to nearly $11 million! Of course, this is just an exaggerated example used to effectively illustrate the power of compounding over a long period of time, but it highlights an important point: by leaving money in an investment, the interest you earn also earns interest, thus increasing your savings exponentially.
Be aware of the burden of taxes.
Many factors play a role in your savings program. These include inflation, market risk, taxes, timing, and more. But did you know that income taxes (or similar taxes) are potentially the most harmful yet also are surprisingly manageable? As one of the certainties in life, taxes will always have a profound effect on your savings effort.
Using the penny trick example again, if you added an 18 percent income tax rate, the pennies disappear substantially. Instead of having over $5 million in 30 days, you'd only be left with $348,394. This shows you the severe and negative impact taxes can have if you do not plan for them. So plan ahead by finding ways to legally minimize the amount of tax you pay, utilize tax free investments such as the Thrift Savings Plan (TSP) offered by the military, and other such tax free ways to save.
What are the lessons that can be learned?
The road to financial independence is a challenging one, but a comfortable financial future is attainable if you apply a few basic strategies. For instance, start to save sooner rather than later, and avoid or defer taxes rather than paying more than you should. When you start your plan is not only important, but also critical in achieving your aspirations, because the cost of waiting can be insurmountable.
Your planning should also maintain your funds in such a way that they can be accessed if opportunities come along. These rare opportunities can often make the difference between earning a little or a lot. Be in a position to seize the moment. Manage your credit so you can leverage opportunities at the moment they are presented.
Life insurance is one investment that can create an instant estate for your family (tax free) exactly at the moment they need it most. The right amount can guarantee the financial freedom of your family for generations. Now that is a legacy!
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