Here’s what some of my clients find is a very motivating fact about saving and investing. It’s called The Rule of 72. It’s a formula for estimating how long it will take for you to double your money. The Rule of 72 demonstrates the dramatic positive effect time and compound interest can have on your savings.
Here’s how you use The Rule of 72. Divide 72 by the rate of return your money will earn. The answer tells you how many years it will take to double your money at a particular rate of return. For example, if you invest at 4 percent interest your money will double in 18 years. (Because 72 divided by 4 is 18.) Here’s a chart with more examples.
Protect And Maintain Before You Invest
The Rule of 72 may make saving and investing sound easy but you know that’s not true. Be careful. Growing wealth takes discipline, consistency, good decision-making, and good risk assessment. You must protect and maintain your financial resources. If you are in doubt about risk or a financial move, always err on the side of being conservative. Build a solid and secure financial foundation.
How do you do that? First, build an emergency reserve savings equal to three to six months of your living expenses. You never know when unexpected hospital bills, disability, a major home repair, an accident, or another financial issue may explode into your life. Be prepared. Keep this emergency fund in an account that you can quickly access without penalty. A bank savings account, certificate of deposit, money market depository account, or some other cash equivalent vehicle will work.
Have Adequate Insurance
Along with an adequate emergency reserve, the right insurance protects you from the most common financial crises like experiencing an injury that restricts you from working or suffering a fire in your home. The most common types of insurance for families and individuals include property and casualty, disability income, health, long term care, life, and umbrella.
Create An Estate Plan
The third and final piece of a solid financial foundation is your estate plan. Your estate is (in simple terms) all the wealth you have accumulated during your lifetime. Estates include real estate, stocks, bonds, retirement plans, business interests, property, personal effects, and anything else you own.
An estate plan is a legal way to define what will happen to your assets when you die. This is important for everyone, not just high net worth individuals (HNWI) and business owners. Work with a lawyer to create your estate plan. Your plan should include a will, a health care power of attorney or proxy, a durable financial power of attorney, and a living will.
Your estate plan gives you the power to select who will receive your assets. You decide how and when your beneficiaries will receive their inheritance. You choose who will manage your estate after your passing. Among the other benefits of estate planning are:
• Reduced probate expenses
• Reduced estate taxes
• Choosing guardians for any young children left behind
• Peace of mind and ease for your beneficiaries (family and those you care most about)
Many people read through educational articles like these but never take action. Doubling their money is exciting but there’s nothing sexy or exciting about the basic financial suggestions like estate planning that we’ve covered here. Still, smart people act. They do set up emergency reserve funds, make sure they have adequate insurance, and create an estate plan.
Talk to your spouse. Define your own particular retirement needs and goals. Take at least one basic step to build your financial future today. You have the power to positively impact your financial future and your retirement comfort. Will you act now to better assure a financially comfortable retirement for yourself and your family?
This information is adapted from my new ebook “Plan, Retire, Relax: Your Retirement Guide Book” which will be available in February. Download 21 Critical Retirement Questions Answered and you’ll receive a free copy.
Gene Thomas Offredi, CFP®, RFC™.
If you haven’t download our free eWorkbook by clicking here.