Tuesday, March 22, 2011

Money Management Part Seven - Investing for Future Goals

A year later, Jack and Jill had paid off all their debt except their mortgage, and had accumulated over $18,000 in savings.  Their feeling of freedom was growing by the day, and their financial stress was so much less than it had been just a few years before.  They had been enjoying social times with Richard and Jane through the year, but it was now time for another "official" meeting.  Jill phoned Jane.  "Pizza night tonight?"

"Sounds great - should we bring the books?"  Jane laughed.  "I bet I know what we're going to talk about after supper!"

"You got it.  See you around six?  I'll get the dough together - can you bring some toppings?"

"Sure thing- it's a date.  See you then!"

After supper the kids settled in to enjoy a video together and the adults settled in to work on the next stage of the plan.

"So - what's next?"  Jack asked.  "Where we are today is so far removed from where we started, I know that we should trust whatever you tell us to do!"  Jill nodded in agreement.

"Well this is where it starts to get fun.  We are going to start building some wealth for your future."  Richard laid out a new copy of their budget.  Jack noticed there was a new category added - Investments, $850.00.

"What's this?" Jack asked.

"That is your investment in your future.  Now that you've got no debt, and you've got some comfortable savings, it's time to plan ahead.  First, we get you putting 15% of your income into longer-term investments."  Richard paused.  "Think for a minute.  Five years ago, could you imagine this being possible?"

"No way.  We had too much money tied up in payments and interest.  It would have sounded like a cruel joke if you'd even suggested it."  Jack looked down at the paper and then back up.  "But here you've got it sorted out so it's not just possible, but there's even money left over!"

"Gotta love it, eh?"  Richard sat back in his chair.  "I've got some investment people that I like to work with and they've treated us really well.  I'll hook you up and get you on track.  Something you need to really pay attention to is your rate of return vs inflation, and these guys are great at that sort of thing."

"Return vs inflation?  What difference does that make?"  Jill asked.

"That is something most people don't even think about.  Inflation has averaged about 3% in Canada.  In order to actually come ahead on your investments, your return has to be more than that.  If you're investing at 2%, and inflation is 3%, then you're actually losing 1% on your investments."

"Scary.  Suddenly those so-called high-interest bank accounts out there that are offering up to 3% interest don't sound like such a great deal anymore."  Jill sighed.  "So, what do you recommend?"

"I recommend you get involved with a professional, and I'll get you the name of my guy before we leave tonight.  But in general, look for solid investments that have a long track record of performance.  You don't have money that you can afford to risk losing, so you want to stay away from the investments that might be just a flash in the pan then disappear.  Mutual funds can be a pretty good investment.

Here's something pretty cool I heard today on Dave Ramsey's radio show.  If you start at age thirty, investing $600.00 every month until age seventy, with no panicking.  Have 'Nerves of Steel' he says.  You keep doing that, in an investment with an average annual return of 12%, and you'll have seven million dollars for retirement."

"Wow.  Now that's something."  Jack was impressed.  "Well, I'm not thirty anymore, but we're looking at more than $600, so maybe it will balance out for us in the end.  I'd be happy to see half that much in the bank at retirement!"

"You said it, friend.  I ran the numbers for you on this one - you're 35, and let's assume you work for 30 years and keep up this monthly investment, earning 12% per year.  You'll have $2,644,293 to retire at age 65.  But if you go five more years, you'll nearly double your investment. $4,729,086.  So stay in good shape, eh?"   Richard smiled, sipping on a fresh coffee.  "There's one other thing you need to look at today.  Look at the next line on the budget."

"College.  But they're still little, just five and seven!  We don't need to worry about that now, do we?"  Jill looked uncertain.  "And what if they don't go to college?"

"This is something else for you to discuss with a pro, but you'll be looking for some of the same things.  A good rate of return is key.  Some investments offer matching, but some of those have some wicked fees attached.  You'll want to make an informed decision on this one.  If you want flexibility in what they can use the money for, maybe an RESP isn't the best option.  Look at what's available, and get started.  I put $200 in that spot, but you can increase it later if you get another raise.  If you're wondering, that will give you over $45,000 ten years from now when your first child is ready to talk about college.  $62,000 two years later.  Split that between them, and you've got a good head start on university, or a college education paid for, or a downpayment on a house, or a wedding... you'll be set for whatever path they choose.  And that's assuming you haven't increased those deposits by then."  Richard grinned at Jack.  "I also increased your allowances a bit."

Jack laughed.  "You mean, I can stop taking peanut butter to work every day?"

Additional Reading:
Get Smarter About Money: Investing
Dave Ramsey's Investing Philosophy
Investment Returns

Online Tools:
Bank of Canada's Investment Calculator
Savings & Investment Calculators
FundLibrary.com Canada's Mutual Fund Resources Centre

Investment Options to Consider:
Tax Free Savings Accounts
RRSPs and Related Plans

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