When things are difficult, people tend not to participate.
This goes for investing, and the results can be financially devastating. Some
investing concepts, simplified and implemented, can add thousands of dollars
to your portfolio over time. We will call our investor Dorothy; she’s from
Oz.
The concept of Time: Dorothy invests $1000 and earns
a return on her investments of 8%. The only difference is time. If Dorothy
wants the money at age 65 and invests the money when she is 20, the money is
invested for 45 years. Now for the math:* $1000 @ 8% for 45 years =
$31,920.45. If Dorothy waited till she was 43 years old and invested the same $1000, same 8%
but now for only 22 years (65-43=22), her investment would be $1000 at 8% for 22
years = $5,436.54. A significant difference! Clearly time is very powerful
when investing. The more time the better; however, starting to invest late in
life is better than not investing at all.
The concept of Rate of Return: The rate of return,
simplified, is the income received from your investments be it interest,
dividends, capital gain, or a combination of these. Some investments like
Guaranteed Investment Certificates (GIC) specify the rate of return as a
percentage, say 4% . So why is this such a big deal? Let’s go back to
Dorothy. Dorothy invests $1000 and can leave it invested for 45 years. Assume she invests this money conservatively and earns a 4% rate of return:
$1000 at 4% for 45 years = $54,841.18. If Dorothy diversified her investments
and held different investment types and obtained a rate of return of 10%, with
the same $1000 and 45 years her investment would be worth $1000 at 10% for 45
years = $ 72,890.48. Again, a significant difference. The effect of obtaining
a higher rate of return can prove financially rewarding.
Lets step back and look at this further. These two concepts
apply to investments in registered plans like RSP’s and non registered
investments. The major difference is the growth inside the RSP is tax
sheltered and will grow even more. Dorothy invested a lump sum of $1000 to
start. Imagine if she applied the concept of “Pay Yourself First”
be it 5%, 10% or 15% of her net income into her investment on a monthly basis.
The value of her investment will grow from the additional contributions plus
income earned on the new contributions. Some institutions will accept as
little as $25 per month into some RSP’s and non registered investments.
Clearly the concepts of time, rate of return and pay
yourself first are proven and powerful concepts that work. Not every 20-year-old has an extra $1000 to invest in an RSP but if they could, what an
asset for later years. Good institutions will help create a diversified
portfolio for you or have a diversified investment structure as a standard
product. They are worth looking at. Shoot for an 8% return year after year and
you are doing well.
A representative from Estate and Financial Planning Ministries is available
to work with you to identify investments to help meet your unique goals.
Everything is confidential. There is no obligation and nothing to buy. Contact
us at efpm@CofChrist.org,
or call 1-800-884-7526 (1-877-526-7526 in Canada).
*Note: a simple calculator will not work on the math above. A
financial calculator is required and the following formula: Future Value (FV) =
Present Value (PV) x Interest x Investing periods (N) FV = PV x I x N
