Foolish Military Investors - The 1 Key Step That Takes You From E-1 To Millionaire
Mitch is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Living paycheck to paycheck is probably easier to do in the military than any other job in the country. Think about it. Housing, medical care and food are provided. You get to wear the same clothes over and over. You can even get by without a car or groceries if you live in the barracks. Now what if I told you that with one key step you could finish your career and retire a millionaire? Seriously. It's easy and painless, all you need is one key bit of knowledge.
If you're single then there are a ton of things that you want to spend that paycheck on. Fancy clothes, fancy cars, fancy toys - the good life, and you should; you work hard and you deserve to play hard. Plus you're investing in your future happiness by "displaying your ability to provide" to potential spouses. And I'm not about to argue with that! Of course if you already have a family of your own then you know that your family's needs are most important. I mean the military definitely does not provide food and clothes for your dependents. But this one key step is so powerful that you can buy the toys and provide for your family and STILL retire a millionaire.
You're probably asking yourself how one step can be so powerful? Well, it takes advantage of what Albert Einstein allegedly said is, "the eighth wonder of the world. Those who understand it, earn it. Those who don't, pay it." Ready for the secret from which our one key step draws its power? Here it is:
This is the equation for compound interest. Angels should be singing right about now. There are bankers and investors who have this molded out of bronze and set in places of prominence. Well, I don't know of any personally, but they should! I mean, I was standing at attention when I pasted that!
Don't worry; I'm not going to bore you with mathematics. After all you don't need to be a watch maker in order to use a watch to tell time. All you need to know is what happens when an amount of capital earns compound interest: every month that amount gets counted and a percentage of that count gets added to the amount for next month's count. The more you have, the more that gets added and the more that gets added, the more you'll have! At first it doesn't seem like much at all, like it's almost not worth bothering. But before you know it the interest alone will buy that new motorcycle that other service members are taking out loans for. It will pay for another one next year too, and the next! With a little more patience the interest becomes like a Private working in a bank vault somewhere just forking over his paycheck to you month after month. In no time, that Private gets promoted to Private First Class. Then promoted again and, well, you get the point.
Think of compound interest as a force of nature. It's like the wind and the step I'm going to tell you about is how to build your sail. Now, in order for your boat to reach the land of the millionaires this one key step makes a conservative assumption: raising your sail in a wind that's blowing at a 6% interest rate. Hold up, you're probably asking, how difficult is it to find a 6% interest rate? Let's take a look at some information from the Federal Reserve:
Realize that these numbers from the Federal Reserve take into account a vast number of U.S. institutions. Let's take a specific look at today's rates from a few banks you've heard of and are probably used to dealing with just to see see how they compare to the chart:
|Interest Rates:||Savings||6-month CD|
|Bank of America (NYSE: BAC)||.05-.30%||.26%|
|Wells Fargo (NYSE: WFC)||.05-.20%||.05%|
|PNC (NYSE: PNC)||.01-.14%||.10%|
The best savings rate offers may beat the FFR by a percentage point but they'll be right there. Certificates of Deposit will be offered to you by the same types of banking institutions. Savings bonds, on the other hand, can be bought directly from the U.S. Treasury. Although these are about the safest investments you can make, you may never get to the land of the millionaires with these weak breezes!
Instead let's say you invest your money in the stock market. Not a specific stock, just The Market! Or, to be specific, the index you see on the news every day: the Standard & Poor's 500 (SNPINDEX: ^GSPC). Let's look back at 40 years of S&P 500 performance.
If you were finishing your military career on the day I write this, August 22, 2012, you'd be looking back at a 20 year annualized return of 7.8%. Looking back at the last 40 years shows a 6.5% return per year. Not too shabby! Realize that an investment in the S&P 500 is really an investment in the growth of the U.S. economy. There is some risk; it may not continue its path of greater than 6% growth. But if that happens we will all be having much bigger problems. You've already demonstrated you believe in this great country through your service. You might as well let the country's vaunted capitalism return the favor and serve you! Now, you aren't compounding "interest" when you invest in the stock market. But by committing to a lifetime of investing, and reinvesting dividends, you are still taking advantage of the same powerful principle!
So what is the one key step that takes you from E-1 to millionaire? Get started on a lifetime of investing. If you start at 20 and catch a 6% wind, it's really easy to be a millionaire by the time you're ready to retire at 65! I'll break down the math Barney-style, and just how painless it is to execute, in the next blog. Here's another secret: Success at The Motley Fool is measured by how much your returns beat the S&P 500! So Fool up, troops! There's wealth to be built.
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Mitch Rubinstein is not a financial planner and the opinions expressed in this blog are just that: one person's opinions. This blog is not endorsed, approved or associated with the Department of Defense. Mitch Rubinstein owns no positions in the stocks mentioned above. The Motley Fool owns shares of Bank of America, PNC Financial Services, and Wells Fargo & Company and has the following options: short OCT 2012 $33.00 puts on Wells Fargo & Company and short OCT 2012 $36.00 calls on Wells Fargo & Company. Motley Fool newsletter services recommend Wells Fargo & Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.