Sunday, June 18, 2006

Father's Day

Happy Father's Day to all the Dads and to all the father figures that have found themselves in the very important role of giving out paternal advice.

I am very proud of my two daughters who are now grown. My youngest just graduated from university at the beginning of this month. Neither has pursued investing as a career, though both have an understanding of "the magic of compounding" and the importance of saving. One of the lessons that my Dad (rest his soul) taught me was the avoidance of debt, even to the extent of paying down mortgages ASAP and always saving regularly some part of my earnings. Having a rainy day fund to handle distress needs was always paramount in his mind and something I tried to convey to my own kids.

My father had little interest in stocks. As a young teen who was intrigued by the markets, I was advised that real estate was the preferred long term investment, especially rental housing. Having observed too many instances of rental defaults and trashed apartments, and having repaired too many blocked toilets for Dad's tenants, I rapidly soured on the notion of maintaining that family savings plan and turned to the equity markets.

But for most young people, long term investment is established through various qualified plans: 401K plans, and IRAs in the US, or RRSPs in Canada. But considerable savings are too be had just by simple conservation and expense avoidance. Most people are quite surprised by the impact of compounding over some years of even minor savings.

Let me convey a bit of very basic non stock market oriented paternalistic advice.

Pack your own lunch. Using this calculator, you will see that saving $5 bucks a day for twenty years at a long term rate of 8% will provide you a nest egg of $57,000.

Ignore your raises. Bank them, don't change your lifestyle too materially. This is tough love, but what a savings vehicle! A raise of $2000 a year for twenty years at 8% banks you $91,500.

Pay yourself first. I sound like some kind of old-fashioned insurance salesman but the philosophy is quite valid. Participate in the 401K especially when your employer is match contributing. This is free money! Only 31% of workers ages 18-25 participate in 401K's offered by their employers. Don't wait...set it aside now. Five thousand dollars in savings a year for a 40 year career at 8% provides a nest egg of $1.3 million. Waiting 20 years to "think about retirement" and then saving at twice that rate ($10,000 a year) just trying to catch up will provide a nest egg of only $457,000, a full 800 grand less. Save a little less now, but do it NOW!

Don't let tax deductibility arguments regarding home equity loans influence your consumption. Banks want your money and will lure you into handing it them. Don't use your residence as an ATM. Sure it's better than credit card debt, but still weigh the cost of the interest expense, even after tax with your tax savings. Please check out this calculator.

For additional savings calculations and ideas please see Hugh's Mortgage and Financial Calculators.

For my regular blog readers looking for some stock insight, thank you for indulging me with this post today. Even though my girls have grown, I just can't stop being a Dad!

Congrats and best wishes to all the fathers on this special day!


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