As you can probably tell from recent posts, I’m moving away from “Personal Finance 101” topics and on to more complex topics around investing, taxes, and retirement. These topics can be straightforward if you live and work in one country, but they become infinitely more complex when you are trying to deal with two different tax jurisdictions.
I’ve now been on this quest to improve my personal financial situation for over six months, and I think I can safely say that I’ve mastered the basics. I’m living within a budget, I don’t have any credit card debt, I’m on track to pay off my student loans within the next year and a half, and I’ve built up my emergency fund. It’s now time to turn more seriously to the topic of investing my money.
I’ve been spending a lot of time setting savings goals and getting my spending under control, but one question I’ve been afraid to tackle is – just how much do I actually need for retirement? It’s so difficult to estimate that I’ve been avoiding it altogether, and instead hoping that the rule of thumb re: investing 15% of your gross income per year will be sufficient. Finally, I bit the bullet and dug in.
Last week, I wrote about how $350/month can become $1 million in 30 years, thanks to the power of compound interest. Many of you commented that this was a fantasy, because the calculation assumed a 12% return, which was unrealistic. (I was THRILLED to see so much discussion, to be honest, because it helps me learn.) So this week, I did some more research to see what level of return I can realistically expect over time.
Guys (and girls). People. Whatever. Remember back in college when some well-intentioned adult told you that you should start saving early to take advantage of the power of compound interest? And remember how you were like “yeah, yeah, I’m 21 years old, I’ve got loads of time. Besides, I’m living month-to-month, how do you also expect me to save?” And then remember how you kind of forgot about it all?
Check out this chart:
Raise your hand if this was your reaction to the title of this blog post: “Yes, I get the concept of paying myself first, but after taxes, mortgage/loan payments, credit card payments, and life expenses, there’s not really that much left.”
That was my reaction, and I’m betting at least some of you had a similar one. I have always said “I’ll start saving seriously, once I pay off my student loans”, or “this month was a really expensive one, but I’ll save some more next month.” Of course, with that approach, I never saved anything substantial.
Then I came across this worksheet from my new favorite author, David Bach.
Austerity Kate 