Tuesday, August 4, 2009
What a fantastic weekend! I hope everyone else had a good civic holiday!
Today I'm going to talk about the concept of growing money.
I like to compare investing to farming your money. You plant seeds and they start to blossom. Over the course of your life they grow and grow. Once you're ready you can start taking what you need from your crops. It's a long process but in the end you benefit greatly from it.
Putting money into a savings account will give you fairly abysmal growth. The only growth you will truely see will be the money that you add to it each month. CIBC's interest rate on their premium growth savings account is 0.15%/annually and it goes up in teirs. Over $10,000 in your savings and it goes to a whopping 0.20%. Over $25,000 and they give you the fantastic rate of 0.25%! Please note the sarcasm! lol.
Lets go back to the $10,000 because I think that's a pretty good number to deal with.
0.15% of $10,000 is....$15. Ok $15 for nothing is nice!
Lets compare this to my personal favourite segregated fund with Empire Life. The dividend growth fund. The 10 year average annual growth for this fund is 6.89%. That's yearly and it also includes last year with all of the wonderful happenings that we had in the markets.
Take our $10,000. In one year this will give us $689. I think this is a little nicer for still not really doing much.
Savings accounts are great for establishing an emergency fund. You need to put some money away that is easily accessible incase of an emergency. Any other saving that you do should (for your own benefit) be through higher rate of return investments.
Alright so we've invested this $10,000 into a fund with a rate of return of 6.89%. You're 24, your current income is $30,000. You should be "paying yourself" 10% of your income each month. This means putting $250 monthly into an investment. At age:
25 this is increased to $15,158. You've deposited $14,000 total. That's a difference of $1,158
35 this is increased to $72,058. You've desposited $41,000 total. That's a difference of $31,058.
45 this is increased to $182,845. You've deposited $71,000 total. That's a difference of $111,845.
55 this is increases to $398,549. You've deposited $101,000 total. That's a difference of $297,549.
See how it grows? It's exponential. The growth is larger the more you have invested. If only you could start with that much eh? hehe.
Ok so lets see what this means when you retire at 65!
By age 65 the same investment would be worth $815,533. This is enough money to pay yourself a minimum of $35,000/year until age 99. Since this whole thing was based on an income of $30,000 investing $3,000/year. This is exactly what you'd want in retirement.
What happens if your income changes? You stick to the same principle of paying yourself 10% of your income. This will help you have the right income to provide you with a comfortable quality of life through retirement.
Starting now, you may not see a large payoff and you may be inclined to put this off until you feel like you need to. However, if you have an income, you need to right now. This will help make it easier for yourself in the future. Some people wait until they are 40 to start investing. Imagine how much harder it would be for them to build up enough income for retirement at 65. Especially since it grows exponentially.
By planting your seeds early you're insuring that you've got the crop that you need for your retirement. I know this is a lot of info and I'm sorry for throwing a whole ton of numbers at ya, but this stuff is important and you should all know it. Feel free to ask me any questions in the comments section, through facebook, or in person!
Have a great one everyone!
Mike
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