It is safe to say that most of us would prefer to pull up our bank statement and instead of seeing one or two months’ worth of salary, see a million dollars staring back.
In actuality, this is not quite such an insurmountable a goal. Apart from winning the lottery, accumulating a million dollars simply requires two things: time and discipline. There really is nothing special or exciting about how this is accomplished either; as the old adage says “slow and steady wins the race”. Also, as we’ll see in a moment, it is equally important that we section off almost to the point of “quarantine” our Short Term, Medium Term, and Long Term savings into separate accounts with separate strategies.
With time on our side to steadily build up savings, we can also take the opportunity to tap into the power of compound interest and unit cost averaging. In addition to slowly and steadily accumulating savings on a regular basis, we must put those savings to work for us. Once invested, the savings grow, and then the growth itself continues to produce returns… and so on and so forth.
There are two keys to this strategy: not being short-sighted, and not taking on too much risk. We are not trying to double our money every year; we are simply achieving steady growth in addition to the regular deposits we make into the account. As the famed George Soros said, “If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring”.
As mentioned above, the main strength here is the time we have to accumulate this million. The below graph illustrates precisely this point. It also serves to illustrate exactly why our older friends and relatives are always trying to impart on us the wisdom to start saving as early as possible…
As we can see here, committing to savings at age 25 requires only half as much each month as putting it off until age 35.
Not readily visible in these graphs is the importance of our commitment to saving. Over the course of 20-30 years accumulating the million, there will always seem to be some immediate “justifiable” reason to “take a break” from saving every 6 months or so. Always. Also, every 2 to 3 years like clockwork some major event will occur in our lives that necessitates withdrawing large chunks from our long-term savings. Both of these issues severely de-rail any plan or ability to accumulate wealth, and are the primary reasons that the vast majority of individuals are never able to achieve financial freedom. However, there are simple and easy strategies to follow that help solve these two issues.
For starters, in order to keep ourselves from failing to save each month, many people find it helpful to set up a system that automatically contributes to their long-term savings account. This “pay yourself first” strategy helps keep forgetfulness and lack-of-discipline from getting in the way of our goals. Secondly, in order to combat the urge to repeatedly dip into our long term savings, it is extremely useful to maintain multiple accounts, each with their own savings strategy to serve their own unique purpose. For example, a Short Term “emergency and day-to-day fund” in a simple bank account, a Medium Term “discretionary fund” to take care of periodic large expenses, and lastly the Long-Term systematic account to accumulate your wealth.
This strategy will enable you to absorb the short-term and medium-term costs as they come up, keeping our long-term nest egg safe and growing. Without both discipline and foresight, it will be difficult or impossible to actually achieve your long term goals.
To learn more about disciplined savings and building financial security, contact Tyton Capital Advisors today.
The Winning Investment Habits of Warren Buffett & George Soros (2006) by Mark Tier, p. 217
Financial Services Review . 1999, Vol. 8 Issue 4, p261. 8p. 3 Charts. – An Integrated Model For Financial Planning