Welcome back to my series, Simple Model for Building Wealth. I am laying out the fundamentals so we can see how we lead our wealth plans astray and how to retake our ability to succeed.
Part 1 of this series is here: Simple Model for Building Wealth Part 1
Part 2 of this series is here: Simple Model for Building Wealth Part 2
Capital and Rate of Return
In Part 3, we are discussing capital and rate. Capital is how much you have invested. Rate is the total return, including market value changes and income from distributions.
We invest, save, and hope for enough rate of return
In the simplest model, we invest whatever we have (or feel comfortable with), and then wait for the growth. If we have savings or windfalls, we invest as much as we can. If we have income, we reinvest as much as we can. We might diversify in various ways, but the general model is to use saving and investing to grow the nest egg and leave it to an expert adviser to find the “best” returns or rebalance the portfolio from time to time.
Investment Calculator: How long will it take to reach your goal?
This investment calculator captures this point of view, so you can run scenarios for how much capital you have to start, how much you can contribute monthly, and then given an assumption on annual returns, you can estimate either the total size of your portfolio or the time to get to a portfolio goal.
For example, if you select the “Investment Length” tab, then you can enter the goal from Part 2, $1,500,000, starting amount of capital, say $10,000, 8% return rate, and $1000 per month additional contributions at the end of each month.
The result is 29.9 years to reach the portfolio goal. Yikes!
The bigger problem is that we know from Part 2 of this series that the goal of $1.5 million is much more than that in 29 years because of inflation.
What if we start with $100,000? 24.2 years to $1.5 million.
Even starting with $500,000 it takes over 12 years to reach the goal. And that achievement doesn’t account for inflation over 12 years.
What if we start with $10,000 but change the rate?
At 12% annual returns instead of 8%, the time to goal is 23.2 years.
At 18% it’s 17.8 years.
Do you know anyone who can get 18% annual returns year in, year out for 17 years? Almost no professional investors in history have achieve that for so long. What are we supposed to do?
What if we start with $10,000, keep the annual return at 12%, and increase the amount we save? Let’s double it to $2000 per month. It’s 18 years to $1.5 million.
Let’s try $4000 per month. 13 years to $1.5 million.
At $8000 per month it’s 8.9 years, finally we reach the goal in less than 10 years. That’s our best result. But remember, we didn’t adjust the goal for inflation yet. In 9 years, the goal at 7% annual inflation is $2.58 million. Back to 12.3 years. If we think inflation is really 3%, then the goal is $1.79 million, reached in 9.9 years.
The challenge is real and daunting
This analysis is simplistic, but it reveals the challenge. You can see why advisers always say you need to save more. That’s where we have the most control over the result IF we use this model.
For most of us, though, if we are doing our best to save a few thousand a month for years, and we want to double or triple that while paying life expenses that are increasing in price, it seems impossible.
This exercise shows you the real problem, that if we follow this simplistic model, it’s highly unlikely we will reach our goals in a reasonable amount of time, if ever.
Now for the hope!
My real purpose is to give you hope. The conventional model is not the only way.
It is possible to reach your goals, even with a rising cost of living
It’s possible to achieve within a reasonable amount of time
The strategies are available to most anyone willing to learn, not just geniuses or pros
You don’t have to have a lot of money or income to start (although having one or both certainly helps)
You don’t have to invest in high-risk assets or exotic strategies, like options
You don’t have to become a real estate investor, agent, marketer, flipper or wholesaler
You don’t have to become an apartment investor or syndicator, raising money from other investors
The most important asset you have is you
your commitment to learn and implement
your commitment to learn what and who to listen to and what to ignore
your commitment to learn more about yourself and your mind so you can make better decisions and take smarter actions
A way forward
The way out of the dead-end conventional model is to see things differently and find strategies that work differently.
Did you know that it is possible to amplify your savings exponentially faster than with typical investing returns?
Did you know that it’s possible to beat inflation handily with stable investments and modest returns? (And I’m not talking about gold or Bitcoin).
Did you know it’s possible to build cash flow much faster than buying rental properties?
Did you know that it’s possible for your portfolio to benefit in both upward and downward markets?
Did you know it’s possible for your portfolio to grow as a result of your own spending?
There are effective ways to grow your capital and generate income while overcoming challenges, like inflation, taxes, crazy markets, and more.
I’m not asking you to take these claims at face value. I will describe these ideas and how they are being used today by myself and people I know. Feel free to shoot me questions anytime, and I will do my best to answer either directly or in posts.
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