Take Control of Your Finances: Smart Strategies for Investing and Retirement

Introduction:

In this blog post, we discuss how to stop worrying about retirement and start actively planning for it! This guide delivers actionable advice on investing and building a financially secure future. We'll break down the essentials of bonds, stocks, real estate, and cash, showing you how to choose the right mix for your needs and create a plan that works for you. This is about more than just saving; it's about growing your wealth intelligently.

Understanding Your Financial Landscape

Savings accounts offer returns close to, but often less than, current bond rates. This highlights the risk of keeping excessive cash, given inflation's eroding effect (at least 2.5% annually) and minimal savings account interest. It is important to maintain enough liquid funds for emergencies or a job loss, but beyond this, our cash holdings should be prudently invested. Bond ladders present a smart strategy to this problem, particularly with currently favorable returns.

Nerd Wallet Savings Calculator

[Image 1: Example of a 2% Bond Return or a 2% Savings Account Return.]

Investing for Growth

Here is an example of the SNP500 assuming 8% over 50 years.  Some years will be 30%, others will be -20%, Average is 7 to 9% depending on the start and end dates. 

We must look at investments over a 20-year period assuming the market conditions of the US do not drastically change.  

Here is a similar scenario starting 30 years later.  Investing $1500 rather than $100 per month.  The first example has less than 100K invested, the second one invested nearly 400K.

Gold and Cash (Bitcoin) are Currencies.  They only hold value only as a medium of exchange.  Gold also holds a little more value because it is also a commodity.  The increase in the value of gold is loosely based on the decline of value for the USD.  A small bit of inflation is not a bad thing because it keeps the currency flowing in the economy.  The real wealth is held in assets, especially income generating assets (Businesses or Pieces of Businesses – Stocks, Real estate).  Once you buy a stock in a good company, or the whole company, you also own some of their earnings every year after that. 

This is where net worth comes in.  Net worth is based on our assets minus our debts.  Cash, boats, cars, etc. are depreciating assets that do not generate income, and they work against net worth.  They are a necessity for day-to-day life, but we must be careful not to overspend on them.  Our home is both an asset and a liability.  The home is an Illiquid non income generating asset, and the Mortgage (Bond) is the Liability until it is paid off.  Owning a home opens other avenues for savings and stability, but we have to be careful to not have too much home and stifle our investing.  This puts us in the “Selling the farm or home to retire” predicament.  Again, it is about having a mix and many options, and this is where an Advisor can look the whole picture and guide you through many different scenarios.  The most important part is to cut expenses and invest as much as possible as young as possible.  As we near retirement, we can narrow the scope.  Time and amount invested are the most important factor early on. 

Bonds are also a currency.  They swing less wildly than stocks, but at the end of the day they are like a savings account.  Once a company or person is done paying off the bond and interest, it is done.  There is a market for Bonds, where they can be openly traded, so they can add stability to a portfolio as we get closer to retirement.  They do not swing wildly, so we can better estimate the earnings we receive every year.  A person with a much larger portfolio can ride out the downturn in the market and adjust expenses as needed, but if we have a small retirement put away, bonds may make more sense.  It also depends on the personality of the person.  Someone who may sell out at the bottom of the 2008 probably should have way more bonds so they do not dip down 50%, but they also will not swing up 50% and more as the market returns.  Many banks go bankrupt because they keep the excess cash in bonds, but as the bond market starts to go up and if people start a run on the bank and draw money out, they have to sell the bonds at a loss to generate liquidity.  This is also why the Social Security fund is short.  The bond market has not been returning enough to keep up.  Now that the interest rates are normal, it may make more sense to have a larger blend of bonds vs stocks.  The Fed rate needs to be around 5% for the economy to be stable and the bond market to work correctly.

Remember, Retirement is a number, not a date. 

 [Image: Historical Returns.  SNP500 vs Gold, VS Dollar, VS Bonds, vs Bills.  Bonds and Bills are a debt instrument. The Dollar and Gold are Currencies with no intrinsic value. Stocks are equity instruments representing ownership of a business.]