This is the penultimate class in the self reliance course. I was excited for another detailed lesson building off last weeks lesson on the same topic: Investing for the future.
Table of Contents
Become One, Serve Together
The lesson started out with some pondering and discussion about serving others, and how that can help us. I think volunteering and serving those less fortunate than ourselves helps put our lives into perspective. Everyone has problems, and if you stop to look around you’ll probably see a lot of people are not doing as well as you. It is true that when you lose yourself in the service of others, you start to really find yourself.
Some feel that they deserve what others already have, which can cause resentment. Others feel entitled to things they have not earned. These two traps blind people from seeing and essential truth: all things belong to God. Resentment and entitlement can be overcome by focusing on the needs of others.
Personal Finances for self reliance manual
We discussed as a group people who could use our help. People in our congregation came up, and we talked about the talents, resources and contacts we have to offer. Sometimes we can’t serve people very well, but we can connect them to someone who can.
Planning For Retirement
For many, it’s easy to put off retirement planning because it seems so far off. Not taking it serious early on will cause major problems. Time is what makes compound interest so powerful, so the sooner you save for retirement, the better and easier. To get started planning you’ll want to try and get an idea of how much you need to save.
There are tons of retirement calculators on the internet. If you have a 401k, or investment account, you likely can find a calculator on the website for your account. CalcXML has tons of great calculators, as does FinancialFreedomBook.com. I personally like Personal Capital’s retirement planner.
Otherwise, two simple formula’s are as follows:
- Number of years in retirement X annual amount needed for retirement
- Your annual spend X 25 (or 35)
The second formula is reverse engineering the 4% rule of thumb which came from the Trinity Study. It’s designed for a 30 year retirement, so it might be wise to do 30x or 35x your annual spend to be sure.
It can be hard to anticipate how much you will spend in retirement as health begins to decline and the cost of care increases. Hopefully your mortgage can be paid off before retirement, providing some buffer. There may also be some social programs but it is not wise to rely much on those. Take a moment to consider how long your grandparents, great aunts and uncles, or parents have lived, and what health conditions they faced.
True security comes from flexibility. Set a goal and figure out how much you need to save monthly.
Compound Interest
This is a fairly simple concept, where the interest from your investments earns interest, in a continuous cycle. Most people don’t see the value of this as it has an exponential effect on money, and our brains tend to think in a linear fashion. Compound interest allows you to get a million dollars for just $160,000, which is 84% off.
Risk vs Return
Most people immediately think of stocks when it comes to investing, but there are many ways to invest. The graph below shows different investment vehicles but it is not comprehensive. Diversifying your investments into many of these is often a relatively smart thing to do. If someone is a real estate expert or stock picker, then diversifying may be a waste of time. Diversification across different investment vehicles helps compensate for ignorance, so experts don’t have to do this as much.
It’s important to invest according to your risk tolerance, but keeping money in the bank is a losing proposition. The middle of this graph offers some great investment vehicles in index funds, large and small cap stocks. I personally am a fan of VTI, VOO and VB – all excellent Vanguard funds. Stocks are probably the first place to start if your employer offers a 401k/403b/457 match of any sort.
My household is all in the middle and upper side of the scale, getting started in real estate and considering business ownership.
Tax Considerations
Finally, you should try and optimize your investments for taxes. The less you pay, the better. There are tons of strategies on this and I would direct you to GoCurryCracker and MadFIentist for more on this subject. In general, the younger you are the more a Roth/Roth 401k should appeal to you. The older you are, the more a traditional account should appeal, but it all depends. Having a bit of both is not bad. You’ll have to pay now or later, and with taxes the way they are, paying now is a good option.
Conclusion
Investing is a big subject and there are so many exciting and new ways to get your money working than you have time to explore. Start with your employer benefits, but if that’s not an option, opening an Individual Retirement account is not difficult at all. Take 20 minutes and do what it takes to get started, if you haven’t already. If you have started, consider your asset allocation, diversification, and the tax treatment of your investments. Look for small ways to optimize for your goals and educate yourself further on these matters. You don’t have to spend hours researching to make incremental improvements to your investments. The most important thing is to do as much possible as early as you can.
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