Three Keys to Growing Your Wealth

Portfolio Planning Article

Charles Schwab & Co., Inc.

Call us at 866-232-9890

Send us an email

Printer-friendly
Type Size: A A A
Email to a friend

Three Keys to Growing Your Wealth
by Bryan Olson, CFA, Vice President, Head of Portfolio Consulting, Charles Schwab & Co., Inc.
December 22, 2004

As we approach the end of the year, perhaps you've started reviewing your investments and planning for a successful 2005. What better time to step back and review the fundamental keys to increasing the size of your portfolio?

When you invest, there are three fundamental levers that impact your ending wealth:

The return you earn on your investments
The amount of money you save
The amount of time you allow your money to grow

Let's look at each of these in turn.

Investment return
In large part, the makeup of your portfolio determines the amount you earn on your investments. That includes your asset allocation, the quality of your holdings, your level of diversification and the annual cost to maintain your plan. Once you have the proper asset allocation and a diversified portfolio in place—the key starting points for investors—you have very little direct control over your actual return, because it's highly dependent on what the markets do. However, you have a lot of control over what you pay for commissions and account fees, so it's worth focusing on getting good value.

That said, many investors focus too much on returns—the asset side of your balance sheet. Let's move to the liability side of your balance sheet where you can wield some real power over your ending wealth by adjusting your cash flows.

Coffee and cigarettes
Relatively simple changes to your daily routine can increase the amount of money you're able to save each year. And the sooner you make these changes, the more time those savings have to grow.

Start by cutting out some unnecessary luxuries or bad habits from your daily routine—and improve your health while you're at it. For example, buying a grande caffe mocha five times a week instead of a large, black coffee can cost around $500 extra each year. (And eliminating the extra 285 calories a day cuts around 75,000 calories each year.) If you're a cigarette smoker, cutting out two packs a week could also save you over $500 a year.

And those weekly savings could add up over time. Giving up a $1 Lotto Scratcher each week is $52 a year—over 20 years, grown at 8%, that could be over $2,500. And forgoing a large $5 popcorn each week at the movies could yield nearly $13,000 over a 20-year period. Suppose you invested that $10 a week you saved by buying black coffee instead of a mocha. After 20 years at a modest 8% return each year, you'd have over $25,000.

These are just some simple ways to save. There are other, even more effective ways like consolidating debt or refinancing your mortgage. And consider what you could do with the money you save. You could invest in a tax-advantaged, employer-sponsored retirement plan like a 401(k), or fund an IRA..

The power of time
The third lever is the amount of time you allow your money to compound. Albert Einstein famously referred to compound interest as the greatest mathematical discovery of all time. Take this example of two investors: Investor A invested $2,000 a year for 10 years and then let it compound for another 30 years. Investor B waited 10 years before investing, then invested $2,000 a year for the next 30 years.

If each earned 8% a year, Investor A would end the 40-year period with $315,000, vs. $245,000 for Investor B. Even though Investor A contributed only $20,000 compared to Investor B's $60,000, Investor A still came out ahead because of the earlier start and longer time to compound. The sooner you make those investments, the more time is on your side.

The gift of healthy habits
The 2004 U.S. Trust Survey of Affluent Americans found that a great concern on the minds of affluent investors (second only to terrorism) was that the next generation would struggle financially. Accordingly, the discipline of regular saving and investing is a great tradition to pass along to your children this holiday season. In fact, it could be one of the most valuable gifts you'll ever give.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The type of securities mentioned may not be suitable for everyone. Each investor needs to review a security transaction for his or her own particular situation. Data contained here is obtained from what are considered reliable sources; however, its accuracy, completeness or reliability cannot be guaranteed.

(1204-8499)

Return to Top