When it comes to money, most people tend to only see two worlds for growing their money. One world is Wall Street and the other world is the bank. Each world has a different marketing message and philosophy on money.
An observation I've had after working with thousands of people over the years, is that we put a lot of pressure on Wall Street and Banks and not nearly enough on ourselves. We've become interest rate chasers and not dedicated savers. I believe both a good interest rate and saving as much as you can are imperative but I think saving is more imperative. Most people are not master investors and most people won't hit critical mass on earning more than they can save for a long time.
So many times I see clients get hung up on rate of return. Yet most people fail to realize that what they contribute to their future can build their wealth faster than what their money can earn. This is why people get sucked into Wall Street when interest rates at the bank are low.
For example, if you earn $50,000 per year and save 10%, that is $5000 saved per year. The next year, your $5000 may earn 5% and add $250 of interest to your account, but you can add another $5000 to the account by being a dedicated saver. That is 20x what your money earned for you in interest. I’m not saying don’t put your money to work. You absolutely should, but what you save will be higher than what your money can earn for many years.
To match the $5000 you can save per year, you would need to have $100,000 earning 5% to equal your contribution amount. At $5000 a year earning 5% annual, it will take you 14 years to have $100,000. So eventually, your interest earnings will catch up with the amount you are able to save, but this only happens if you are first a good saver.
Again, what you save matters most for most of your life. I meet with so many people that don't want to save like they know they should so the conversation inevitably turns to how can they earn 10% or 20% or 100% return on their money. I'm not saying this is impossible but you need money to go make money. Of course you could use other peoples money but you still have to cut them in on the deal and you have to have an incredible track record of handling and growing money or no one will lend you money.
I once read a tale of two friends. One friend saved $5000 a year and was able to consistently earn 10% annual year in and year out. The other was a good saver and saved $10,000 a year but was only able to earn 5% annual year in and year out. The story then ends by saying the friend that earns 10% interest won't catch up to the friend that earns 5% for 24 years. See images below to see the math at work.
So for 24 years the friend earning 10% each year gets to brag about his interest rate and his growth, but the very interest rate he is bragging about won't catch up to his friend saving more money each year for 24 years. I don't care what age you are at when you start, 24 years is a long time.
Now let me ask you this, what is more likely, that you could average 10% for 24 years or 5% for 24 years? Obviously, 5% is more realistic. So how is this possible? Because the friend put the pressure on himself to save more and not on the interest rate that he could not control, he maintains the lead on account value increases for 24 years. Work with the side of the equation that you can control.
As you improve your skills, move up the company ladder and expand your business or income, you will be able to save a greater amount of money. Eventually the goal is to have your principal passively earning more than you can contribute. As you near retirement, it should be earning more than you could earn working full-time. What you contribute makes a huge difference over time.
I'm not saying interest rate is not important so please don't take that away from this post. I'm simply pointing out that we should first have our focus on saving as much as we can. Then, as we have money to work with, we can venture into investments that have the ability to earn higher rates of return.
With a properly structured cash value insurance contract, you can do just this. You can start off saving as much as you can in a program that will earn between 5-6%. As you have money, you could use that money to stop losing interest and depreciation on car purchases, have access to conservative interest rates for buying real estate or you can put that money to work in investments that allow you to put the money back into your plan as you finish with it.
Until this time, save as much as you can. What you save matters most for most of your life.