Time, Resources and Return

Time, Resources and Return

There are only three ingredients to achieving financial independence: Time, Resources and Return.  Let’s take them in the order of least importance:

Resources:  While the amount you save is important, you can only save a portion of your income

Return:  This is the second most important, because return can have a huge impact on your end results.

Applying the Rule of 72: By dividing the rate of return into 72, you can determine the number of years it will take to double your investments.

For example:  A 7% return will double in value every 10 years.  A 10% Return will double every 7 years. 

This is where the ABCs of investing comes in play.

If you make the mistake of leaving all your investments in you’re A-Bucket (in the bank at 1%-2%) it will take a lifetime to double your investments.

  72 ÷ 1 = 72 years

72 ÷ 2 = 31 years

But, if you invest in a modest growth and income portfolio at 7%, you will double your investments every 10 years, or 4 to 5 times in a lifetime.

This is where time comes into play.  Time is the number one ingredient to achieving financial independence.

The tale of two brothers and the cost of waiting:

Bob is a procrastinator and invests $12,000 at age 40 and achieves 7% annual returns; doubling his investment every 10 years.

Bill is a fast starter and invests $6,000 at age 20 and achieves the same 7% annual returns, doubling his investment every 10 years.

Who will have more money at age 60?

 

Bob                                                                  Bill

------                                                                 Age 20            $6,000

------                                                                 Age 30            $12,000

Age 40             $12,000                                   Age 40            $24,000

Age 50            $24,000                                   Age 50            $48,000

Age 60            $48,000                                   Age 60            $98,000

Bill will end up with twice as much as Bob despite the fact he save/invested only half as much money. 

Time is powerful.  The key to success is to get started!

All returns are assumed rates of return, not a guarantee or promise of success; and should be used only as a means to make this illustration.

Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC.