Stage 4 is the really exciting stage. This is where all of your hard work will be paid off. When you are at the point that you have your debts paid and you are systematically saving for future needs and either have a plan for paying your house off or have it paid off, you can then focus on building wealth for the future. At this stage it is up to you where you want to take things. Building a solid foundation in the previous steps has gotten you to the point where you have a lot more choices in life.

Determining Your Goals

Your goals will greatly determine which direction you go from here. Maybe your goal is to follow the FIRE path. This stands for “Financial Independence/Retire Early”. There is quite the movement of people following different methods to achieve this goal. Maybe your goal is to have enough money saved when you do retire to be able to travel and have enough for other things you’ve always wanted to do. Or maybe your goal is to have enough to be able to practice extreme generosity. Giving to others is oftentimes more enjoyable than spending on ourselves.

How to Grow Your Wealth

There are a number of different factors that affect how much your investments grow. Once you have your savings established for items we talked about in the previous stage, you’ll want to invest additional money for future goals. We talk about a lot of different ways you can invest your money. There are many different investment options even outside of the traditional stocks and bonds. We are not financial advisors, so nothing we talk about is offered as a suggestion for what you should individually invest in. Our goal is to try and help educate you about the different investing options that are available. What you choose to invest in will be greatly determined by your risk tolerance and your age and also the goals that you have.

Factors That Affect Investment Growth

The three primary factors that affect how much your investments grow are:

• The length of time that you have to invest
• The amount of money you contribute to your investments
• The rate of return that you get from your investments

The two factors that affect things the most are the length of time and the rate of return. Some people would think that it mostly is determined by how much you contribute. While this factor does have an effect, the length of time that you have for your money to compound and the rate of return can make a much bigger difference as we’ll demonstrate.

Time Horizon – How Long You Have to Invest

Someone who is starting their investing journey in their 20’s has a huge advantage over someone that may be starting this journey in their 50’s. It doesn’t mean that you can’t be successful in building wealth starting at a later age, you just don’t have as much time to work with.

Here is an example. Say you’re in your 50’s and start putting $500 a month into an investment fund. You do this for 10 years and get an average annual rate of return of 10% per year. At the end of the 10 years your investments would be worth $102,422 which includes $60,000 that you would have put in and growth of $42,422 from the return on the money invested. Now you wouldn’t be able to retire on this amount of money alone, so you would either need other sources of income, or you would need to work longer to save more. If you continued this for another 5 years, your investments would have grown to be $207,235 which is about double what it would have been 5 years earlier.

For someone starting their investing journey in their 20’s, you may be surprised in the difference of how the extra years would make on your investment growth. If we look at the same example of putting $500 a month into your investments at a rate of return of 10% per year, after 40 years your account would have grown to be $3,162,039. Now I do realize that amount of money won’t have as much buying power in 40 years as it does now, but you’ll be way ahead of the game by being consistent with putting money into your investments. Another thing to think about is that over those years, your income will probably grow and you can increase your contributions as time goes along which will make the final amount even higher.

Contribution Level

The amount that you contribute does make a difference to how much you end with, but only primarily in relation as a percentage to the increase in your contribution amount. For example, if we take our example of the person who invested the $500 for 15 years and double the amount of the monthly contribution to $1,000, the amount that you would have in the end would also be doubled from $207,235 to $414,470. Obviously it does make a difference to contribute more. If we look at the example of the person saving for 40 years and they also contributed $1,000 a month instead of $500, the value in your investments at the end of the 40 years would be $6,324,079. And of that amount, $5,844,079 would be the earnings on the money that was invested.

Rate of Return

When you look at how the rate of return can affect your final outcome may be the most surprising, especially when you look at this on the longer time frames. Let’s look at our example of someone putting $1,000 a month into their investments for 15 years and compare different rates of return on that investment portfolio:

• 8% Annual Return – Value after 15 years: $337,606
• 10% Annual Return – Value after 15 years: $414,470
• 12% Annual Return – Value after 15 years: $499,580
• 15% Annual Return – Value after 15 years: $668,510

As you can see, increasing the rate of return even a small amount results in a much higher final balance. Though the difference really is evident when we go with a longer time frame. Here is an example looking at a 40 year time frame:

• 8% Annual Return – Value after 40 years: $3,491,007
• 10% Annual Return – Value after 40 years: $6,324,079
• 12% Annual Return – Value after 40 years: $11,764,772
• 15% Annual Return – Value after 40 years: $31,016,054

As you can see the effect of the combination of longer time frame and higher rate of return can make a huge difference in your investments. You may be thinking, “There isn’t a way to get an average rate of return of 12% let alone 15% consistently over 40 years”. That’s what a lot of people would tell you. But there are investments that can create higher than average rates of return without a significant increase in the risk level. I fully understand that there are many people who would disagree with me on this. Part of what we want to do here at Everyday Money Manager is to help educate you on some of the investment opportunities that are available to the average person that you may not be aware of. Again, we are not suggesting or recommending these for any individual investor, but if you do your homework and spend some time becoming educated, there are ways to increase your investment returns. Not all of the opportunities will be appropriate for everyone, so you’ll have to determine what works for you and what you feel comfortable with. Some of the investment opportunities do take some time to manage, but that’s where you’ll need to determine how much time and effort you want to put into managing your investments.

Diversification

One of the keys to lowering your risk level and overall volatility is to make sure you are well diversified. This means having your money invested in several different investments and investment types to spread the risk out. There is a certain level of volatility to many types of investments, some have more than others. Volatility is the amount of fluctuation in the value of an investment over time. If you can be well diversified, it can reduce the level of volatility to your overall portfolio of different investments as there will be times when some investments will have a higher level of volatility, or in other words, they will go up and down in value more than or in different directions than other investments that you have.

Asset Allocation

The best method for making a plan to have diversity in your investments is through what is called Asset Allocation. This is basically a plan on how you’ll divide up your money or assets into different types of investments and how much will go into each. I will provide some different examples, but this is in no way a recommendation on how you should divide up your money as each person is different and will diversify in different ways based on their individual goals and risk tolerances.

In many cases the Asset Allocation of your investments will be by percentages. You could then occasionally rebalance them back to the desired percentages. The reason to do this is that some investments will grow faster than others and by rebalancing, you’ll basically be reducing your risk in the ones that have grown more and putting some of that growth into the lower risk assets.

Disclaimer

The content provided on Everyday Money Manager is information to help users become financially literate. It is neither tax nor legal advice, is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Tax, investment and all other decisions should be made, as appropriate, only with guidance from a qualified professional. We make no representation or warranty of any kind, either express or implied, with respect to the data provided, the timeliness thereof, the results to be obtained by the use thereof or any other matter.