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Tuesday, 18 June 2019
Agent Resource Center
This Old House - Do-it-Yourself

Building Long-term Wealth

Written by Posted On Tuesday, 11 June 2019 08:30

To retire comfortably, you need to build meaningful wealth. But that’s a lot easier said than done. Simply working hard and saving your pennies is extremely unlikely to give you the nest egg that you’ll need to enjoy a wonderful retirement. The math just doesn’t work out. Even as you save your cash, you’ll be losing value because of inflation.

That’s not to say that you shouldn’t work hard, build a rewarding career, and keep moving up the ladder toward higher-paying and more rewarding jobs. Rather, you need to be aware of another part to this equation. If you’re going to grow your wealth, you’re going to need to find ways to earn interest on your money.

Combating inflation

Interest helps your money generate more money. You can earn it on investments, or you can enjoy set rates like savings account rates and term deposit rates. A big part of why interest is so powerful is a concept called “compound interest.” Compound interest causes your interest-earning cash to grow exponentially over time.

Take a hypothetical investment of $100 and a hypothetical return of 10 percent. In the first year, you’ll earn $10. Not bad! But the next year, you’ll earn even more: Your 10 percent return will come not on $100, but on your new total of $110. That gives you an extra dollar, and you can easily see how, over time, this compound interest could grow powerful indeed. This is why saving for retirement early in life is so important. A dollar that you save in your 20s is much more valuable than one that you save in your 50s, because it has more time to earn compound interest.

So where can you earn this interest? Let’s talk about your options.

Where to get interest

When you’re saving for retirement and other long-term goals, it’s important to balance risk and reward carefully. Generally speaking, the biggest potential interest earnings are going to come with the largest risk — these are the bonds that companies might not pay back, the penny stocks in companies that could explode in value or go belly-up, and so on. By contrast, you’ll find lower (but sometimes still quite attractive) interest rates in places such as savings accounts, which are very safe.

You can get a better interest rate than a savings account by opting for a term deposit (in which you agree to keep your money in the account for a set period of time — no taking it out early) or in savings bonds, each of which are less liquid than cash in a savings account but potentially more helpful to your long-term goals. Another great way to earn interest without gambling your whole retirement fund is to focus on large-cap stocks or, better yet, funds that track major market indices like the S&P 500. You could still see your investment lose money, but you’ll be much less likely to lose everything. Until society collapses, the S&P 500 is probably going to be worth something. This strategy is smart in the long term because, generally speaking, the stock market goes up: If you’re investing now in your 20s, you can be reasonably sure that your overall return over the next 50 years will be positive.

Experts generally agree that you’ll want to get more cautious as you approach retirement age. That’s because you no longer have decades of time on the market to make up for a potential short-term market dive. Such a dive is a much bigger deal when you’re just a few years from retirement, so you’ll want to be more cautious in those years and shift more of your money to safe bets such as short-term bonds and term deposits.

Investing doesn’t have to be difficult or full of crazy risks. A smart and simple use of interest can turn your careful savings into a great retirement nest egg.

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Harris Johnston

Real estate investor with ownership stakes in commercial and residential projects in New York City, Philadelphia, Miami, Denver, and Laguna Niguel.

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