Saving for the future can be a daunting task, but with a clear financial plan, simplified approach, and reasonable amount of self-discipline, building long-term wealth is not a daunting task.
Let’s begin with a few basic assumptions:
Accumulation Target: $1,000,000 USD
Investment Time Horizon: 25 years
Rate of Return: 8.00%
Beginning Value: $25,000
Here’s the plan:
STEP 1: Commit to investing regularly.
Specifically, to accumulate $1,000,000 in 25 years according to the assumptions above;
- Invest $11,000 per year OR $750 per month
If you’re unsure how to find $750 within your budget, consider utilizing a budget calculator or creating your own simple template via Microsoft Excel and Google Sheets. This will help keep you accountable for your purchases, and gives you insight to your cash flow.
STEP 2: Select the Appropriate Investment Account(s)
You’ll have many options to consider. Here are a handful of excellent options:
- Workplace 401(k) or 403(b), assuming there is a company match.
- Roth IRA, assuming you are eligible
- General Investment Account (i.e., Non-Qualified Brokerage Account)
- UTMA/529 College Savings Plans (for children)
Charles Schwab, Vanguard, Fidelity, and Betterment are a handful of reputable custodians.
STEP 3: Invest with Conviction and unleash your inner Warren Buffett.
Put your money to work in a long-term growth portfolio featuring equity investments. In this regard, Pursue a simple, globally diversified, cost-effective, and tax-efficient investment strategy.
Sample Portfolio
- 80% US Equities
- 20% Non US Equities
Invest with conviction and be wary of trendy, complicated, and conflict-ridden investment strategies. Stick to investing into a rich collection of incredible businesses you can understand. Aligning your strategy with your personal values may help you develop conviction and endurance.
Rebalance Periodically
- Buy Low and Sell High to ensure you maintain your desired allocation, no less than a few times per year.
Embrace the volatility. Be like Buffett.
It is inevitable the market will go up and down over the next 25 years. It’s even conceivable that amazing businesses may decline in value by as much as 50% during extreme periods of market turbulence! In times like these, do not panic. Trust the process and use the instability to your advantage. Ask yourself; what would Warren Buffett do?
He’d likely tell you to “Be greedy when others are fearful, and be fearful when others are greedy”. These are words to live by.
STEP 4: Maintain a cash reserve consistent with your needs.
How much cash or short-term reserves do you need to avoid disrupting your 25-year plan? If you’re an MD, professor, or have a secure source of cash flow, you can likely afford a minimal (1-2 month) reserve.
Conversely, if you’re an entrepreneur and/or have intermediate financial goals on the horizon (e.g., buying a house, leaving your job to start a new business), maintain an appropriate reserve consistent with your specific plan.
Otherwise, your 25 year plan is not your reserve under any circumstances. This approach may help you maintain the long-term perspective and patience you’ll need to achieve investment success and avoid allowing temporary negative events from interfering with your long-term plan.
STEP 5: Open your account today and/or recruit a professional to help you activate your plan and stay on track.
- Of course you can do this yourself. Thanks to incredible Fintech innovations, you can activate an account in minutes and initiate your strategy on your own.
- Alternatively, consider a “Robo-Advisor” such as Betterment, SoFi and others designed to automate this for you.
- Betterment, SoFi and other fintechs generally rely on mathematical algorithms and advanced software to build and manage your investment portfolio with minimal human intervention designed to take investor psychology (i.e., fear) out of the equation.
- For an even more customized investment strategy and holistic approach, consider hiring a credentialed financial advisor whose investment approach and values you are aligned with.
Bottom Line: Keep it simple. Invest $750 per month, every month, for 25 years. Invest for Growth. Invest with Conviction. Use the volatility to your advantage. Get started right away. On your own or with a professional advisor by your side.
The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.