Some of our dreams need a little money.
This list is where we begin.
We need to have some idea of how much we need to save and how we will save that.
There may be part of you rebelling already.
Relax!
Of course you don't know the future!
But it will serve you to imagine one scenario.
The enemy of a good plan is the search for a perfect plan.
Make assumptions, and then change them when you get better ideas, or better information.
Our goal is to enable these possibilities.
Let's pause here and consider some simple arithmetic.
This set of videos is not about retirement, but for most of you, saving for retirement
will be the biggest item -- by far!
Hopefully you have a long time to save for retirement so I want to share two guidelines
so that you can choose an appropriate goal for our investment plan.
If you reach retirement age in good health, there's a very good chance you, your spouse,
or both of you, will enjoy 30 years of retirement.
A good rule-of-thumb is that you'll need 25 times what you'll draw from your savings for
30 years of retirement.
For example: someone may wish to retire at age 65 on $60,000 a year.
If they expect $20,000 a year from Social Security then they'll need $40,000 a year
from their savings.
That means you'll need to save 25 x $40,000, or $1 million to be fairly confident you won't
run out of money if you live to age95.
You might want half this; or twice this.
It's a personal choice.
This guideline does account for inflation and most stock market scenarios, but assumes
your money is invested wisely, like we'll describe in later videos.
Invest money you'll need soon very conservatively, like in a MoneyMarket or a Bank CD; definitely
not the stock market.
On the other hand, money you need beyond 10 years really must be invested in a portfolio
of stocks and bonds, and that is what most of my videos will help you understand how
to do correctly.
But Rick, you say, the stock market is WAY too volatile.
Correct!
This is a history of annual returns of Large Company Stocks.
In any given year the value might fall by half!
Look what happened in 2008.
Now let's look at the historical outcomes for holding stocks still longer.
Each bar represents the return after holding for 10 years.
Sometimes people lose money after holding 10 years!
(like 2008!)
But, most of the time stocks outperform an even bigger risk: inflation.
Your risk of losing your investment in the stock market is small over a long holding
period.
Your risk of losing the value of your investment due to inflation is much larger!
This is why YOU MUST INVEST: and you need an investment return bigger than inflation.
Suppose you plan to retire in 30 years and inflation is just average -- every $1000 you
save today will be worth only $410!
But wait, does this chart suggest we should own only stocks and hold them for a very long
time--until when you need that money?
It's true our investments would grow, but we can't change the volatility of the stock
market.
Remember, we saw that any given year your stock holdings might lose half of their value.
We'll see in Rule#3 that each year we will want to gradually convert some of our stocks
to bonds so that we don't hold too much risk by the time we need the money.
One popular guideline we'll discuss later is to "own your age in bonds".
We're going to continue working on this plan all the way through Rule#10.
Right now it probably looks like you are going to need a lot of money.
OK.
So how much do you need to save?
Here a short answer that works for most young adults: 5% of your gross paycheck for those
big ticket items, and another 10% for your retirement.
And if you haven't already, you should use the very first money you save to establish
a sound financial lifestyle before investing for the future.
I have a separate video about this.
If you get a paycheck, you already get a large slice withheld for various taxes.
These are just guidelines--it will vary state-to-state, individual-to-individual.
Our human behavior is that if we don't see it, we don't miss it.
So a time-proven strategy for saving is to pay yourself first with that 15% automatically
deposited.
Here's a balanced budget that works for many people.
See how this works for you.
It applies 45% of your gross income to your essential expenses that you NEED, and 15%
to discretionary, or fun stuff.
Initially you might be thinking that you need everything you spend money on.
Use these questions to get at your true foundation expenses:
1.
Could you live in safety and dignity without this purchase?
2.
If you lost your job, would you keep spending money on this?
3.
Could you live without this purchase for six months?
If you withhold money from your paycheck to pay your taxes, and you pay yourself first
with an automatic deposit for your long-term savings, then you don't need a complicated
budget.
You simply spend what you have left: one dollar for fun expenses for every three dollars you
spend on the essentials you need.
Some of you might be thinking, "Hey, you're only young once.
Maybe I should save 10% for big-ticket items, and only 5% for retirement."
This is a tradeoff that only you can make.
Time is your friend.
You'll see in this next very short video example how you can harness the power of compound
interest by starting to save early.
Find other explanatory videos, smart tips, and links to useful resources at FinancingLife.org.