My mom used to tell me, “there’s a time and place for everything,” which sounds like good, solid meat-and-potatoes mom-speak until you learn that she followed it up with “and now’s the time for gin!”
But the point holds. There is a time and place for everything, including gin, stocks, bonds and real estate.
Every investment has a proper use.
So, today, we’re going to begin the journey toward the pot o’ gold, friends. We’re going to put on our boots and hunt for the secret “get rich” equation that’ll help us choose the perfect investment. Like a good doctor, we’ll focus on a patient with a problem.
Luckily, we happen to have one right here. Julie is a good friend of Average Joe. She’s 32 and wants to retire at 60. She’s in the medical field, and hopes to accumulate enough to have the option to retire even earlier. On the other hand, she currently enjoys her career and isn’t sure if she’ll even want to retire that early. Because of this, she’s looking for flexibility. Good for her. I like to hear stories about people loving their work.
This also helps us eliminate investments. Hear the word “flexibility?” That immediately eliminates several investment choices, narrowing the field.
Isn’t this fun?
And to go faster, we can chuck any discussion about how much money Julie has already saved or which investments she’s currently using. Sure, both are important, but our goal today is to show you how to start choosing the right investment, not to oogle Julie’s assets.
Get your mind out of the gutter. You know what I mean.
Diatribe: Countless advisors I’ve met begin this process in the wrong place, as do plenty of online helpers. This isn’t rocket science. We don’t have to start with today’s hottest investment or the perfect opportunity. Instead, we begin with a simple equation.
I’m back off my soapbox.
The equation is this: Money (times) Return (equals) the Goal.
It’s painfully simple. Julie is going to need so much money and have it perform to a certain specification to reach her end game. It’s math time, boys and girls. If we know two of the factors, we can solve for the third. In this case, what do we know? We already have the goal, and Julie knows the amount of money she currently has stashed away. At this point, she needs to solve for the minimum return she’ll need (at this current pace) to reach her objective.
Ta-da! Once we know the return we need, it’s time to begin choosing investments.
But, before we do that, let’s not gloss over some problems.
We made some assumptions. If someone else performs an analysis on your behalf, you must understand what assumptions were used! If you don’t you’re bound to forget the entire equation. Here are Julie’s assumptions:
– She’s going to continue to save at the same rate until retirement. This could easily change (for better or worse).
– The tax treatment of her assets will not lessen her return between now and retirement (we’re assuming that her return factor will be an after-tax amount).
There are others, but those are the biggies.
Tomorrow we’ll accomplish a single goal: I’ll show you free places online where you can complete this equation. I know, isn’t it exciting?
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