We all have things that are important to us...things we cherish. Our spouse, our kids, friends, family... But there’s one thing we should cherish that usually goes unnoticed: our compounding interest curve. Doesn’t sound exciting but that curve is wildly important to our future. I have a friend in the firm who jokes that he has three pictures on his nightstand: one of his wife, one of his kids, and one of his compounding interest curve.
It’s a joke and that sounds silly but...we all only get one compounding interest curve in life. So, we need to cherish it. We need to protect it.
You know what I mean by a compound interest curve, right? Basically, it’s like a hockey stick - it’s relatively flat at first, then it starts to curve up and eventually if things go our way it shoots straight up. Like this:
Of course, in real life it’s not so smooth like that. But you get the idea. We might only get one curve, one chance to have our money grow. And what’s it take for that curve to work? The potential to get to that fun part at the end where it’s way up in value? Well we have to save and add money to the curve. And we need to get positive returns. But more than anything else we need time.
Think about this hypothetical example. If we put $10,000 into an investment account it’s not going to be worth a hundred grand the next year. That would be super cool but it’s not how it works. Unless we invent google or something (and my professional financial advice is you should do that if you can) we need to wait for that curve to do its work. We need time.
The curve takes around 30 years to get to that fun part - the part where it’s really shooting up. Think about it - 7% on a million bucks is going to increase our portfolio by way more than 7% on $10,000 ($70K rather than $700 if you’re counting at home).
So if we know we get just one curve in life and we know it takes around 30 years to really work then we need to cherish that curve. To protect it. Because if something happens to make us fall off that curve, to start over, then we’d just have to wait 30 years from then for the potential to have our money really grow. We cannot allow ourselves to have to start over. That can be the difference between retiring at a decent age and having to work when we’re in our 80’s.
Our clients would rather strive to be certain they’re going to get to 90-95% of their maximum wealth potential than shoot for the stars and maybe they end up with more money but also maybe they’re working longer. And to have that certainty we need to protect our money and our curve.
So to do that we have to ask, what could happen to throw us off the curve? Whenever I ask my clients they almost always say job loss as their first answer. We can’t stop our clients from losing their jobs, but we can help make sure they have enough liquid money available so they can sustain themselves while they find another job.
What else could throw us off the curve? Lots of things can happen but what are the biggies? Clients often suggest a medical issue. And they’re right - paying for the care of a loved one is a big issue. Even bigger - what if we get sick or injured and can’t go to work? Can’t earn that paycheck we need? If that happens not only do we not have money coming in, money to save to add to the curve, but also we will need to actually take money off the curve to sustain ourselves. Nothing works financially without that paycheck. That’s where disability insurance can come in. People think they have that coverage through work - and often they do - but it’s almost always not nearly enough. It’s not sexy to think about but a personal disability insurance policy can be essential to a financial plan depending on your situation.
What else could derail our plan? Well, we live in a litigious society. Lawsuits happen all the time. So we need to make sure we have the right liability coverage in our home, renter’s and auto insurance policies. And many people might benefit from an Umbrella policy on top of that. I get it that this stuff isn’t sexy, but if we want to protect our curve it’s exactly the stuff we need to pay attention to.
The last big thing that can ruin our plan is death. Because for people like me that are in a committed relationship and/or have kids - that curve isn’t just for me. It’s for my wife and kids too. I’m not worried about having enough money just for me to retire - I want enough for us to help pay for college for our kids, enough for me and my wife to have a great life for the rest of our lives. And if something happens to me I still want my kids to have help paying for college, I still want my wife to have a good life for the rest of her life. So that’s where life insurance comes in. It also can be an essential part of a financial plan.
Having funds available if we lose our job, having insurance to protect us if we are sued, get sick or pass away...we need those things if we want to stay on that curve.
Because that’s what we do with the things that are most precious to us. We protect them. And maybe put a picture of them on our nightstand.
Robert Angel, Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). Securities products and advisory services offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America® (Guardian), New York, NY. PAS is an indirect, wholly-owned subsidiary of Guardian. Strategies for Wealth is not an affiliate or subsidiary of PAS or Guardian.
This material contains the current opinions of the author but not necessarily those of Guardian or its subsidiaries and such opinions are subject to change without notice. Data and rates used were indicative of market conditions as of the date shown. Opinions, estimates, forecasts and statements of financial market trends are based on current market conditions and are subject to change without notice. References to specific securities, asset classes and financial markets are for illustrative purposes only and do not constitute a solicitation, offer, or recommendation to purchase or sell a security. S&P 500 Index is a market index generally considered representative of the stock market as a whole. The index focuses on the large-cap segment of the U.S. equities market. Indices are unmanaged and one cannot invest directly in an index. Past performance is not a guarantee of future results.
Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). Securities products and advisory services offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America® (Guardian), New York, NY. PAS is an indirect, wholly owned subsidiary of Guardian. Strategies for Wealth is not an affiliate or subsidiary of PAS or Guardian. CA insurance license #0G64811. 2019-91350 Exp 12/20