I use a portfolio tracking software from Personal Capital to keep an eye on movements within my portfolio, it sends me a weekly alert email to update me on the status of my investments, and last week I was very excited to receive the message to my Gmail account that my portfolio was up 25.64%. I’m going to share how to do it in this post. The link to Personal Capital is an affiliate link, if you decide to use them to track your finances too then I may receive compensation from them.
Firstly, a move of such a high percentage is typically involved in a high risk strategy such as a highly leveraged Options play or buying a distressed stock that suddenly announces surprise turnaround earnings, or perhaps an acquisition. However all of these investment strategies can equally tank by that 25% or even more. But this move has absolutely no risk at all. Are you ready to hear this?
I added 25% more cash to my portfolio. Yes, I know, you feel like I tricked you here, but the message is very, very important. You simply cannot build a portfolio enough to retire on without saving and earning enough money to create a robust series of savings vehicles.
You need loaded up Retirement Accounts, short term savings accounts, mid term emergency funds, Non Tax Advantage Brokerage accounts and if you plan to remove salary from your income stream in the form of early retirement then you need a new income pipeline -this would be most commonly rental property or if you have sufficient bankroll from Dividend Stocks or Bonds.
I am seeing a dangerous trend in the Personal Finance space currently, people are preaching extreme frugality and living a simple life but they are also not focused on grafting to earn enough money to retire comfortably on. When you think of money and retirement remember that your earning years are finite, and regardless of your industry will ramp up and then gradually decline.
Understanding your earning capability
If you are in a mediocre earning profession and do not seek to raise into a management position your pay rate will generally be quite stable and boring, not much in the way of bonuses. There should be a COLA increase annually where the salary will increase roughly inline with inflation, and maybe a couple of points on top if it is a good year. You cannot decide to just retire early unless you have a sudden injection of wealth, it takes a long time to build up your nest egg when you are earning around this level.
Frugality does pay off, but only in spades once you hit a certain income level
If you are earning $40,000 per year ( a good salary for many parts of the Country) how much can you really afford to save each month? If you consider the tax advantages of a 401(k) and fully load it for $17,000 is the remaining $23,000 enough to live on? Could you take that $23K and afford rent whilst you save up for deposit on a home? Could you also have enough to pay the other bills and enjoy life too?
I used arbitrary numbers, but the purpose is to illustrate how much you are going to need to load into a Retirement Account. Let’s say you are like the average college graduate who leaves school with debt – first order of business must be to clear of debt and start saving ASAP. If you were debt free by 25 and managed to save $17,000 into your 401(k) every year for 10 years you’d probably be good in retirement. But don’t forget that you cannot touch that money until you hit retirement age, that is another 30 years of living. In that time you need to be able to pay off your mortgage, eat, send kids to college, pay for weddings, medical care and travel. If you do decide to pull the plug on the working life then you need enough of a nestegg to support that.
However, once you start earning more, and still keep an eye on your expenditure you can certainly start tucking away more and more money for that retirement, but you need to watch out for lifestyle inflation when you do. Most people cannot hack the constant bombardment through the media (hopefully not though cable..) that tells us success is measured by the clothes we wear, the cars we drive and the houses we own. Success is freedom, not slavery.
The stock market cannot be relied upon to provide you returns
Countless ‘experts’ advise that the average return from the stock market is 8%, whilst over time that may be true, if you have no other money and need to draw from your brokerage account when it is a bad year, and your account has dropped by 30%, each dollar you pull out is magnified by the losses and your budget goes out of the window. Think of it like this. In a good year you need $23000 to live on so you sell 2300 shares of Ford to get that money, in a bad year the Ford stock is crippled so you need to sell 4600 shares – you are decimating your savings. If you were still earning you could use this as time to buy more, but if you are already ‘retired’ you can’t do much other than stress.
So, sorry to be all doom and gloom, but if you want 25.64% returns like I got last week, you need to work more, earn more, save more and THEN once you hit a proper level of savings can you consider retirement. People telling you otherwise are selling you up the river, blogs that talk about retirement are using advertising to make money from you to pay for their jobs, they aren’t living the dream that they are selling you. Whats more, many of them are in worse financial shape than you are. Tread carefully my friend.
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