Saturday, January 19, 2008

Patience, patience, and yes, more patience.

Most of us need it. Very few of us truly have enough of it. Doctors have lots, but not the kind we're talking about. It truly is a virtue, even when it comes to building wealth.

We need patience. It will obviously help us in every part of our lives, but especially when it comes to building a firm financial foundation for yourself. Wishing about being financially free and wealthy, will not get you there. Playing the lottery will most likely not get you there (and if it does, it's been reported the majority of them are broke within 5 years). You need the patience to let the money work for you.

First a disclaimer. I am NOT a stockbroker, or financial planner. I am not telling you to buy any investment product, or a particular stock, mutual fund, or bond. For that, you need to consult a licensed broker and/or planner. What I am trying to do, is show a concept that hopefully you, my readers, might not be aware of...and hopefully put to use.

Let's use the stock market as an example (I know some would argue against this, but that is another topic...this is merely a simple example, and not advice to invest in an index). There is a lot of talk right now about it. The last few days, there appears to be a downward spiral of stocks. There is talk of a recession coming, if it isn't already here. Here is where patience would pay off.

The natural inclination is to sell your stocks (if you have any), before they lose more money. Realize there is an ebb and flow to the market and our economy. There will be bad years, and there will be excellent years, and a lot of years in between...just have the patience to know the long-term average is in your favor, and let it sit.

The S&P 500 averaged 11.8% from 1982 to 2001. If you had invested $10,000 in 1982, and let it sit all the way through, and NEVER touched it, you would have in the neighborhood of $93,000. What if you decided to sell based on a bad year? What if by doing so, you missed some of the BEST performing days? How much money would you have made with that $10,000 investment? If you missed the 10 best days...$56,000. That's a $37,000 difference. What about the 30 best days? You would have about $28,000...or a $65,000 difference. And the best 50 days? Not looking so good...about $16,000, for a difference of $77,000. All for not having that money in there for a relatively few days. Have patience.

Another problem quite a few people have problems with, is letting compounding work it's magic. Ask a kid if they would rather have $1000 a day for 30 days, or a penny doubled everyday, for 30 days, and they go for the $1000 a day, every time. So do most adults. But this shows the magic of compounding. Take the first option, you have $30,000. Take the second, and after 15 days, you have $163.84. Ouch, $164 to $15,000...what was I thinking? But wait, keep going. On day 30, that penny is now $5,368,709.12! Still think the $30,000 was the better deal? The magic of compounding takes time, and happens near the end...but a significant number of people do not have the patience to let it get to that point. Back to the took it 22 days to catch up with the $1000 a day...but it took off from there. In 8 days it went from $22,000 to over $5 MILLION!! That is the power of compounding (remember I always say, SAVING MONEY is MAKING MONEY?)! Now, realistically, will that happen to you? no, you won't get those kinds of returns, but it is great example to grab you eye, and show how compounding will work for you.

Here is another example ( a VERY basic example). You put $100 into a high yield money market account(MMA), of say 5% annually. At the end of the first year, you'll have $105 and some change (for this example, I'm using rounded numbers). The second year, you will earn 5% on the $105 (you are compounding, because you are making money in the form of interest, on the money you made in interest the first year). At the end of year two, you have $110. Year five leaves you with $135, and year 30 leaves you with $450. Granted this is a small amount, but in my example, other than the first $100 investment, nothing was added to the principal other than earned interest. What if we added $5 a month? Adding a total of $60 a year, would leave you with almost $4600 in 30 years. Want more, just increase your monthly contribution. Ten dollars a month can turn into $8800...$20 a month will get you $17,000. Get the picture? ANYONE can find $20 a month to invest...ANYONE!! You can have any amount you want, if you are willing to cut a few unnecessary purchases out of your monthly budget.

The only other thing you'll need, is a little patience.

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