Building a solid financial foundation seems boring, wouldn’t you rather be trading stocks, buying low, selling high and feeling the rush that comes from risking your money for the chance of hitting the jackpot? Maybe I’m a boring person but I’d rather start with a foundation and then play around with money that I know I can afford to lose. In fact that is exactly what financial guru Suze Orman does with her money.
If you’re like me you want to start with something safe, predictable and liquid. Unfortunately the astounding .05% return that a savings account will get simply won’t do. So where else can we look?
Well before we even consider where to put our saved money we should first talk about the absolutely dismal savings rate in America. I’m not sure when or where it happened but somehow we got the idea that saving 5% of our income was excellent. Let’s check back in with reality: lets say I make 100k per year, so conventional wisdom would tell me to save $5,000 per year. meaning that I survive off of $95,000. So in order to sustain my quality of life, that $5,000 per year that I’m stashing away will need to grow big enough to provide $95,000 dollars per year during my retirement.
Let’s get geeky with a little math: if I saved that same 5k per year for 40 years into an account growing at 5% my account value at the end of the 40 years would be $603,999. Now it’s time to retire – I’m going to leave my money in the account growing at 5% and withdraw what I would normally need to live off ($95,000). Using a simple “how long will my money last” calculator I found out that my balance of $603,999 would last all of about 7 and half years.
So now I have two options: I can either choose to live on significantly less or I can choose to continue to work and postpone my retirement. Sometimes the situation doesn’t offer the luxury of continuing to work so the only option available is to survive on less money, which is never fun.
Hopefully it’s clear by now where I’m headed with this – save more money!! Thinking that saving 5 or maybe even 10% of your income will grow big enough to sustain you for 15-20 years during retirement is simply a mistake. Okay so I save 20% of my income, where do I put it? Well if you are prone to playing the stock market I would recommend putting that money under your mattress, because for the past 12 years the stock market has done absolutely nothing. Next option would be a savings account or CD – as I mentioned before the returns inside these vehicles are pathetic and almost not worth it.
I tend to side with Suze Orman’s personal philosophy on where she saves her money – namely bonds that are 100% safe no matter what. And just like Suze I am willing to give up higher returns for the bonus of never having to worry about my money going backwards.
So there you have it, the first step to building a solid financial foundation is to save more money. Next, don’t risk what you can’t afford to lose. Finally, put that money somewhere guaranteed – meaning you are guaranteed to have it when you want it and you are guaranteed to never lose any of it no matter what.