This morning I was reading an interesting Bloomberg article on the lack of savings being accumulated by a large percentage of the population, including those earning between $100-$150K per year. Astonishingly in the survey, close to 50% of those have less than $1,000 in savings, and about 18% have absolutely nothing. Even those who earn over $150,000 annually are struggling to save adequately, with roughly 29% having less than $1,000 saved up, and 6% having nothing saved at all.
We all enjoy consuming and obviously inflation in areas such as housing and healthcare can pressure just about any budget. With that said, there is a reason why Einstein reportedly made the statement “Compound interest is the eighth wonder of the world.”
The whole concept of investing is to have your money working for you as hard as you are for it.
Obviously, there are going to be good and bad years for the market, but by pursuing a sound savings and investment plan you are positioning yourself to prepare for future expenditures, such as retirement, education, healthcare and future consumption.
The longer you invest the more benefits you will receive from compound interest.
The Rule of 72
Many are familiar with the rule of 72. It is a very useful rule of thumb, an approximation of how long it takes to double your money based on certain return expectations. For instance, if you have an investment with an annual interest rate of 6%, it will take roughly 12 years for that investment to double in value. Conversely, if you have an investment that is earning interest at 12%, it will only take roughly 6 years to double your money.
T&T Capital Management
At T&T Capital Management, we are blessed to work with many clients across the United States. We’ve seen just about every type of savings, investment, and spending habit that you can imagine.
In our experience, those that are able to sock away a certain amount on a monthly, quarterly, or annual basis are the most successful at maximizing their retirement goals.
Just as importantly, these savers are often long-term oriented investors too. There are numerous studies at how most fund investors, dramatically underperform the funds that they are invested in. The reason for this is that most market participants chase short-term performance. Because stocks fluctuate, often at far greater rates than fundamentals would dictate, this short-term focus often results in market participants buying when short-term performance has been strong, meaning stocks are more expensive. In addition, most investors tend to sell when short-term performance has been negative, and stocks are more likely to be more inexpensive. I know investors that missed out on many millions of dollars by selling Warren Buffett’s Berkshire Hathaway in one of its several major declines of approximately 50%.
Investing by definition takes patience, time, and savings.
Compound Interest can work against you
Just as importantly, compound interest can work against you. Currently 10-year Treasury bonds are only yielding around 1.67%. Even junk bonds are only yielding a little over 6%, despite the fact that defaults are increasing, mostly in the energy and mining sector. If you are paying 15-25% interest on credit cards, you are setting yourself way behind in reaching your financial goals. Personally I use credit cards for everything, but I always pay it off and never pay interest, because I always want compound interest working for me, not against me. Now this isn’t to say that all debt is bad. Right now with interest rates so incredibly low, mortgage debt can be quite beneficial. Rates between 3-4.25% are attainable, which are some of the best rates we have ever seen. In addition, mortgage interest is tax deductible.
I believe that at T&T Capital Management and the unique strategies that we have available, double-digit annual returns over the long-term are a reasonable expectation.
Obviously there is no guarantee and returns will be lumpy. We’ve had years over 30%, we’ve had flat years, and we’ve had slightly negative years.
Often we will talk to clients about their mortgage debt and they will be in a rush to pay it off. I get that as I don’t like taking on debt either, but I certainly utilize a mortgage because I believe we can earn substantially more on our money than the interest we pay, while we also benefit from the mortgage interest tax deduction. This is smart finance. At the same time, I wouldn’t pay 20% on a credit card, in the hopes that that money can be invested for 25%, as the odds are not in favor of that, particularly when you look at where valuations are and given that interest rates have nowhere to go but up. Much of this might be very obvious to you, but if it helps anybody than it is worth sending out. We started TTCM on the premise that by providing what we believe to be the best product and service at a reasonable price and acting in our clients’ best interests, we would be successful and could grow. Our promise to you has never wavered and we will continue to always abide by those beliefs and that philosophy. If you have any questions, or if we can assist with anything, please don’t hesitate to give us a call. My direct line is 805-886-8140!