Technically compounding begins with the first dollar, but when does compounding exactly take hold, when do we really start to FEEL the effect of compounding?
Compounding is almost like magic. It turns even the smallest amount of money into millions if given enough time.
Ben Franklin bequeathed $2,000 to the cities of Boston and Philadelphia in his will BUT with the stipulation that they could not draw on the investments for 200-years. The original amount has compounded over 200-years from $2,000 to $6.5 million!
But do you have to wait for 200-years to feel the effect of compounding? Definitely not.
The effect of compounding can be SEEN almost immediately but to really FEEL the effect of compounding takes at least a few years, plus, as well see below, it also depends on the rate of investment return.
This is the time of year when everyone starts talking about investment returns. It’s been a wild ride and just months ago it would have been difficult to imagine reaching positive investment growth year over year. With the incredible ups and downs of this year, investment returns are bound to be in the headlines over the next few months.
For some people, investment growth is an important metric. They care about time weighted returns, money weighted returns, and breaking down their year over year growth by geography, sector, and even individual investments.
We, however, don’t care about investment returns.
In fact, I couldn’t tell you what our year over year returns have been this year or in past years. The only way we’d know is because our discount broker likely tracks that for us. Otherwise it’s just not a personal finance metric we put much value in.
Of course, we do care about long-term returns, but we don’t care about year over year returns, and here’s why you shouldn’t either…
What would you do in a financial emergency? What steps would you take? Do you have a plan in place?
It turns out that nearly 4 out of 10 people don’t have even a basic plan for a financial emergency. In the latest Financial Planning Canada survey, nearly 40% of respondents said they do not have an emergency fund.
While that stat is pretty alarming, the good news is that 6 out of 10 people are saving for an emergency, but is that the only thing you can do?
Our plan includes multiple layers of protection if we were faced with a major financial emergency. There are four key things that we would do. These four things would allow us to cover basic expenses for 5+ years! How’s that for peace of mind!
This 5-year “safety net“ wasn’t something that we created overnight, but we’re thankful we now have a strong plan just in case the worst were to happen. We hope to never get to that point, but it’s nice knowing we have a solid plan that’s ready to go in case things get really, really tough.
Here are the four things we would do in a financial emergency…
Retirement calculators are everywhere. Nearly every financial institution has some form of retirement calculator. They all work very similarly, they require a few inputs perhaps age, income, spending etc. and then they provide some analysis/recommendation about retirement, how much to save, how much to spend etc.
But how accurate are these retirement calculators? What assumptions are they making when doing a retirement projection? Are they even worth the effort?
In this post we’re looking at some of the good, the bad, and the ugly parts of retirement calculators.
In general, retirement calculators make some very broad assumptions to create a very simple retirement projection very quickly. There is nothing simple about retirement, so creating a projection with only a few inputs in only a few seconds is already somewhat suspect, but as we’ll see below, the possible issues go way beyond that.
These are just some of the issues to watch out for when using a retirement calculator.
There’s a common misconception that financial planning isn’t necessary when you’re young. Young people are often told to go “read some books” about personal finance. Financial planning is traditionally thought of as something reserved for those with higher income, higher net worth, transitioning into retirement etc.
The fact is… this couldn’t be further from the truth.
One of the BEST times to build a financial plan is when you’re young, when you have lots of options, when you’re designing your life (both personally and financially), and when you’re making some BIG financial decisions that will impact you well into the future.
Some of the financial decisions you make while you’re young can haunt you for years or decades. Making the right decisions now can mean less stress and greater peace of mind in the future.
So why is there this misconception that financial planning isn’t for young people?
Most likely because financial planning in the past was focused on products, it was all about investments, insurance, new debt etc. Products that could be sold. Young people were often left out of the conversation because in general, young people don’t need products, they need advice.
Getting the right advice is so important when you’re young.
Even small decisions can have an enormous impact over time. It’s important to get the right advice early on, avoid common mistakes, and create the right systems and habits that will pay dividends for decades to come.
This advice should cover a few key areas that “traditional” financial advisors rarely cover.
It’s a challenging time for new graduates. The employment environment is difficult in many sectors/industries, plus the cost of rent and housing have outpaced inflation for years and years. It can feel very daunting to leave post-secondary when faced with mediocre job prospects and sky-high housing costs.
In some situations, the “bank of mom and dad” will step in and provide support. But, for the majority of families, that isn’t an option.
So how can parents help provide new grads a “leg up” in this challenging time?
More and more parents are inviting their adult children back home for 1-2 years after graduating to help them save money and pay off debt.
It may not be a cash gift, but it can provide nearly the same advantage.
Living at home to save money is a strategy that is on the rise. Parents are encouraging their children to take advantage of this opportunity and more and more adult children are doing it.
Living at home after graduation creates the opportunity to save $20,000, $30,000 or $40,000+ in one year, an opportunity that may never happen again.
Living at home for 1-2 years provides a huge head start for a new grad. This head start can be used to pay down student debt, build an emergency fund, start investing, buy a house etc. etc.
But it’s not all positive though. Living at home for a couple years also has risks. Without having a strategy in place it’s very easy to succumb to pitfalls like lifestyle inflation etc.
Here’s why parents should encourage their adult children to live at home for a couple years after graduation, and why new grads should seriously consider taking advantage.