Strategic Investing
Military Money Strategy does not provide personal investment advice and we are not acting in the capacity of qualified licensed investment advisors.
Consult A Professional
Before you begin any investment program, you should always consult a financial advisor. Each person's situation is different and only yourself and/or a certified financial planner can map out a plan that's just right for you.
Once you have your plan in place, it's time to start investing. Doing research into the types of investments available and understanding the associated risks can help you make informed decisions that are tailored to your personal goals. It's important to keep track of market conditions and adjust accordingly as needed. Additionally, you should communicate with your financial advisor often to discuss changes that may be needed.
When you are ready to begin investing, it's important to select investments that make sense for your profile. Your risk tolerance and financial objectives should be taken into account when selecting investments. Additionally, consider carefully what type of investment vehicles will work best for you. Some investors prefer stocks while others may opt for mutual funds or Exchange-Traded Funds (ETFs). There are also other options such as real estate, bonds and more. Researching different types of investments and seeking advice from a qualified professional can help ensure that the decisions you make fit with your individual needs.
Compound Interest
Albert Einstein called compound interest (CI) the 8th wonder of the world and is quoted as saying: "He who understands it, earns it; he who doesn't, pays it."
Compound interest (CI) is an incredibly powerful tool to use in your strategic investment program. Essentially, it refers to the earning of additional interest on top of interest that has already been earned or paid previously, creating a "snowball effect" over time.
Earning It
The power of compound interest comes from its ability to exponentially increase returns at a rapid rate. Over time, small investments can add up to large sums of money. If we look at the above compound interest formula, there are three factors that affect the resulting amount.
You can run this calculation on both what you plan to invest per period and your total investment/savings. I like to run it on both. For instance, if I am going to invest $1,000 this month, my CAGR is expected to be 6%, and my holding period is 10-years, I could say that my $1,000 invested today will be worth $1,790.85.
Or you can run it on your entire investment/portfolio. For instance, after I added that $1,000 to my savings, my portfolio was now worth $26,700, I could expect the total to be $47,815.63 in 10-years.
Beginning Balance
This is the amount you begin with. Or in terms of savings, what you are saving and investing every period. Again, this amount is up to you and should be what you're comfortable investing/saving. As stated above, you should also consult a certified financial advisor to help determine what that number should be.
What We Can Control: Reducing your expenses and living below your means will free up more capital to save and invest.
What We Can't Control: We all have limits to our income and basic needs that have to be met monetarily. Our savings/investment dollars are always going to be finite.
Compound Annual Growth Rate (CAGR)
This is the average rate of return you will earn on your investment per period. There are many different types of investments that can offer various rates of return, so it's important to do research and find one that best fits your risk tolerance and expected returns. The old adage is that the higher the expected return is, the riskier that investment is and conversely for lower expected rates of return.
What We Can Control: After doing your own research/due diligence and/or discussing with a certified financial planner, you can construct a diversified portfolio of investment assets suitable for your risk tolerance, timing, and personal situation. Each portfolio construct will dictate what your expected and actual CAGR will be.
What We Can't Control: Markets are generally unpredictable in the short-term and sometimes also in the long-term. Even though sometimes your investment is highly rationale, markets can be extremely irrational for long periods of time.
Time
The amount of time a given investment will be held is also an important factor in calculating compound interest. A longer holding period allows more time for interest to accumulate, thus leading to higher total growth than if the same amount was invested for shorter periods. This is why investing for the long-term is so beneficial - compounding works its "magic" over time!
Some examples of $5,000 invested with a 8% CAGR for different time periods:
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1-Year: $5,400
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2-Years: $5,832
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5-Years: $7,347
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10-Years: $10,795
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20-Years: $23,305
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40-Years: $108,623
What We Can Control: To maximize your returns, you should invest as soon as possible. This approach can lead to incredible results down the line!
What We Can't Control: If some years have passed and you weren't able to contribute to a savings program, you can't jump in a time machine and have a redo. All that's left is to maximize your returns with the time you have left.
But what did Einstein mean by paying it?
Compound interest also needs to be considered when taking out loans or making other financial commitments that involve interest payments over time. Paying more than the minimum balance each month will help to reduce overall debt faster and save money in the long run. Additionally, the higher the interest rate of the loan/credit you use, the more interest you're going to end up paying over the life of that loan.
Carrying credit card debt can have serious implications for your financial well-being. From sky high interest rates to hidden fees, the costs associated with this type of debt may be difficult to overcome without taking drastic measures. It's best not let yourself get in too deep a hole before it becomes unmanageable!
For instance, if I have a $5,000 credit card balance and my interest rate is 18%, I can expect to pay a whopping $6,923 on interest only if I make only the monthly minimum payments! So that $5,000 I borrowed now becomes a $11,923 expense. Check out the minimum payment calculator at Bankrate.
What We Can Control: Shopping around for the best lending option, paying down debt faster than necessary and understanding the terms of your loan are all ways to control and lower the amount of interest you accrue.
What We Can't Control: The interest rates set forth by lenders and creditors can be difficult to negotiate or change, leaving you obligated to pay off any accumulated interest with the agreed-upon rate. Additionally, if you're in a situation where it's hard to make payments on time due to financial hardship, then fees/penalties could further increase your overall balance.
Compound Interest is a Powerful Ally
The power of compound interest should not be underestimated as it can exponentially increase returns over time, allowing for large sums of money to be accumulated from small investments. It is important to understand the three factors that affect the resulting amount: beginning balance, compound annual growth rate (CAGR), and time. With appropriate guidance, research, and due-diligence, you can create an effective strategic investment program tailored to your needs and goals.
Free Downloads
Download our Excel sheets with built in compound interest calculators and monthly savings charts.
CI & CAGR Calculator
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Savings Returns Worksheet
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Set Yourself Up For Success
Making a plan for financial stability and investing over time are essential steps to achieving long-term success. It's important to understand the risk associated with each type of investment so you can make knowledgeable decisions. With help from a certified financial planner, you can make sure your strategy is tailored to your situation and goals. By proactively monitoring market conditions and frequently communicating with your advisor, you can ensure that your investments remain on track. This will allow you to build a solid foundation for future prosperity in both the short-term and long-term future.
Read on to see how military pensions are making service members instant millionaires everyday!