Money Should Never Be Spent
OK Tom, if money should never be spent then how am I supposed to pay my bills? Well, how to do you intend to pay them in retirement?
You won’t be working or maybe you will if you’ve not prepared for retirement. Good investing can make you a millionaire by putting your money to work.
Almost everyone has thought about winning the lottery. What would I do with millions?
Your Millionaire Checklist
When I was younger I always thought I’d have the big mansion, swimming pool, 8 car garage, just material things.
As I get older I know that those things are a waste — not an asset. The home might appreciate over what I paid for it but what about all the other costs associated with that monster mansion.
How much would I have to sell the house for to regain the cleaning costs, lawn care, wear and tear, taxes, and maintenance I spent on this white elephant?
This is what I mean when I say money must not be spent. Only what the money earns should be spent.
In my humble opinion one of God’s greatest gifts to us is the principle of compound interest.
For example, assume that when you were 19 years old you put $5,000 in a Roth IRA (Individual Retirement Account) and never put another dime in.
How much would you have at retirement?
Here’s the math if you withdraw it at age 72:
- If you got a 5% return you’d have $69,693 – Not exactly big bucks
- If you got a 7% return you’d have $193,061
- If you got a 9% return you’d have $524,809 Half a million big ones for doing nothing but putting away $5 grand. Over 100 times what you invested.
- If you got an 11% return you’d have $1,400,912 a cool million for letting $5,000 work it’s magic.
- If you were lucky enough to get a 13% return you’d have $3,674,565 all for investing just $5,000.
OK I’ll agree that 13 percent is a stretch but certainly not impossible. There has never been a 20-year period in history where the S&P (Standard & Poor's) returned less than 12 percent.
But what if you were disciplined enough to put $5,000 in a Roth IRA every year? Then what would happen?
Invest A Car Payment
Five thousand divided by 12 = $416.66 per month. The average car payment in the US is about $535.
So what would happen to the same percentages above if, instead of buying new cars every few years, you drove old used cars and invested in you?
- If you got a return of 5% you’d have $1,358,563 not bad.
- If you got a return of 7% you’d have $2,874,643 - More than double your money for just another 2 percent.
- If you got a return of 9% you’d have $6,295,459 – Almost three times as much for an additional two percent.
- If you got a return of 11% you’d have $14,086,021 now we’re in big bucks.
- If you got a return of 13% you’d have $31,896,989.
The Four Percent Rule
You should be able to take 4 percent out of savings without lowering the principle. Let’s look at the 7 percent return. Four percent of $2,874,643 is $114,985.
Do you think you could live on that year after year and still have 3 percent added to your original investment?
How Much Did You Invest?
Let’s look at what you did by investing $5,000 per year in your Roth IRA.
You put in $5,000 per year for 53 years and you still have that money it wasn't spent it's still yours.
That’s an investment of $265,000 and the cheapest return of 5 lousy percent would make you a millionaire at $1,358,563.
You just made five times what you put in. At the higher returns it would be even better.
Some Final Thoughts
Want some really good news about the Roth IRA? Whatever amount you take out is — are you ready — tax free. Yep the IRS will not get a dime of your $114,000 Roth IRA investment. No taxes on Roth IRA distributions.
And when you hit 65 you can up your contribution to $6,000 a year for the additional 7 years. That additional investment will make the above figures even higher.
As I said, money isn’t meant to be spent — interest is made to be spent.
You can spend it now and it’s gone. Or you can spend what it earned for you later and never run out.
As I’ve said many times, — If you will live your life for a short period of time like most people won’t; you can live the rest of your life like most people can’t.