Saving money is hard as you grow older. Getting married, having kids and their expenses, needing a car and taking care of the parents. How the hell do you find large sums of money for investing to grow your wealth?

6 years ago, I came across Richard Russell’s 4 valuable advice to folks all walks of life. The one that left the greatest impression was the difference between an investor who starts investing at 19 years old and stops at 25 years old, versus one that invest the same amount from age 26 all the way to 65.

Their record would have been equal.

Achieving the rate of return is the key, and probably what we discuss more on this site. This week, I cam across an article by Andrew Hallam, who wrote millionaire teacher. The key takeaways are a few things

- We know that he does low cost indexing and rebalances his portfolio
- We know the market moves in rough 20 year cycles. What are the chances after 45 years your money doesn’t grow? How about 39 years for the Investor A?
- In today’s way of living, your dollar is going to be divided into more things that need your attention. If you want to make sure you got enough for retirement, perhaps it is imperative that you start at an early age (18?)
- How many 18 year olds know this concept?

“Fifty six percent of 18-34 yr olds say they’re saving $0 for retirement! (via cnnmoney.com) How can young investors be encouraged to think long term?”

The answer is really easy. To get young adults to think long term, they should strive to be lazy and spend more of their income during their lifetimes. Who wants to scrimp in their 20s, 30s and 40s, so they can have bucket loads of money in their 60s, 70s and 80s? What a waste.

I’m talking about spending more money during a working lifetimes AND ending up with more money for retirement. Here’s an example:

Joe Smith studies law in college.He becomes a lawyer at age 26, but he doesn’t know how to be lazy. So he spends the money he makes. OK, this might not make sense if you’re a “worker” who’s used to his or her nose on the grindstone, but stay with me.

Joe starts saving at age 40 for his retirement. And he socks away $2000 per month for 20 years. In total, he “saves” $480,000 ($2000 per month x 12 months x 20 years). That’s a lot of money to save. And what Joe saves, he doesn’t get to spend.

If he makes 8% per year on his investments, he’ll grow his savings to $1.18 million. The poor guy isn’t much of a thinker. To build a $1.18 million investment portfolio, he has to save $480,000 of his salary.

Call Joe a sucker for punishment.

Tim isn’t really smarter than Joe.But he’s lazy.There’s no way he wants to save $480,000. He works at the same law firm as Joe, makes the same annual income, but wants to spend more over his working lifetime AND end up with more money than Joe.

Tim starts investing just $200 per month ($6.66 per day) at age 18, which he puts together from the odd weekend job. From age 18 to 26, he keeps investing the same amount. If he makes 8% per year on his investments (the same return that Joe makes) he’ll have $27,570 at age 26.

When the law firm hires Tim (at age 26) he starts investing $600 per month and keeps it up until he’s 60. He earns the same salary that Joe did.

By the time Tim is 60 years old, he has $1.6 million—nearly half a million dollars more than Joe.

Tim ends up with $1.6 million, compared to Joe’s $1.18 million.But Tim was able to spend nearly $100,000 more than Joe while he was working…on fun things, like holidays, toys, and dinners on the town.

Joe is a worker. He saves more and ends up with less money.

Tim is lazy. He saves less (spends more) and ends up with nearly half a million dollars more than Joe.

It pays to use your head and be lazy, like Tim.

Jimmy

Monday 28th of May 2012

Just went on POSB site and saw the latest deposits interest rates..Since the interest rates have been revised, I think now is good a time as any to start investing since you can't get much returns based on pure savings.

http://www.dbs.com/posb/deposit/default.aspx

Drizzt

Monday 28th of May 2012

hi Jimmy, it has always been this low. and we are being eaten alive by inflation. what have been your money muse?

[email protected]

Saturday 26th of May 2012

Guys, at least we started rather early still. Drizzt, the post u shared puts it so well: Use compound interest early. Meanwhile, we must consciously sharpen our skills on how to generate 8% or more during our journey.

It is a sad but true fact that some people realise these only in their 50s. We are considered very lucky.

Drizzt

Sunday 27th of May 2012

HI SI, you are right. But perhaps the author thinks its simple that in the long run the market should generate 6% returns.

invested

Thursday 24th of May 2012

10% or 8% annual returns is not realistic.

Perhaps use 4 or 5 % which is very good under present conditions. I think 3% constant throughout is realistic enough.

I dislike the way many of these "gurus" use compounding based on a simplistic 10% rate. It gives a false picture and yet it serves their position well. Its good drama.

There is also risk management and diversification.

Unlikely ethos adopted by 18 year olds.

We need to determine 'wealth' and that may mean lots of things to different people.

We need to determine comfortable lifestyle.

Within a 45 year period, financial, political upheaveals can wipe out all savings.. not to mention personal events.

Drizzt

Monday 28th of May 2012

hi invested, i find that you are a very rational guy who asks the right questions. for myself, i use a long term 6% yield +2% growth model.

i agree the use of compounding returns is easy and feel good for people. but putting it in practice and u will see how hard it is.

Dividends Warrior

Wednesday 23rd of May 2012

The power of compounding over time. It is amazing. :)

ot

Wednesday 23rd of May 2012

The key assumption here is 8% compounding. the 8% earned is fully reinvested again and again for 8% again and again. what happen no chance to reinvest due to market condition?

Drizzt

Wednesday 23rd of May 2012

hi ot, u group your cash as your oppotunity fund.u only invest when the business and value u are comfortable with. thats what music whiz will do.