Slow and Steady Wins the Race

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Slow and Steady Wins the Race

Last week I stopped to rescue a snapping turtle crossing 250 West in front of the Boar’s Head. You can learn a lot about financial management from snapping turtles.

Snapping turtles have amazing instincts, and can reach their target within several hours even when captured and moved two miles from their goals. Averaging a quarter of a mile per hour, they are not fast creatures, but they are persistent. Their persistence for a long period of time makes up for what they lack in speed. The same wisdom can be applied to financial investments.

Saving a little bit every day is an easy path toward financial prosperity. For example, by saving and investing a dollar a day you can fund your child’s college tuition in 18 years. By saving two dollars and fifty cents a day from age 20 to 65 you can grow a portfolio of a million dollars. And a regular savings program for the next six years is better than starting to invest in year seven and continuing for the rest of your life! After six years, the compounded interest in your account will be producing more growth than your regular contribution.

When Albert Einstein was asked what was the most powerful force in the universe he replied without hesitation, “Compound interest.” Each of these amazing financial miracles is due to the power of compound interest. Compound interest is the key that allows people with modest finances to acquire large financial portfolios.

We all know that an investment earns interest on a regular basis. When the earned interest is added into the account, the interest itself earns interest the next time interest is computed. This is compounding the interest or simply called, “compound interest.” Investment portfolios compound the returns of your stocks and mutual funds in the same way that compounded interest works in a bank account: They add a financial multiplier that gradually increases over time.

After several years of regular investment, an account is earning more in compound interest than due to regular influx of cash. Given enough time, the value of compound interest overwhelms the significance of what is being added to the account.

Put even more simply, “Money makes money.” And if you are willing to endure not spending your money choosing to invest instead, you will ultimately have significantly more at your disposal.

Here are seven ways to design a savings program that will last a lifetime:

1. Live day to day within 65% of your take home pay. Of the 35% you aren’t spending, giving 10% to charity and saving 10% for large expenses or emergencies will leave you with 15% toward taxable and retirement savings.

2. Start today. Every seven years you delay starting a disciplined investment program you cut your ultimate net worth in half.

3. Pay yourself first. Use an automatic payroll reductions or checking account transfers to regularly move money into your retirement or savings account. Transfer the money before you have a chance to spend it.

4. Keep your money invested. Keep your checking account within 2-3 months of your monthly spending amount. Save and invest any excess and put it to work meeting your financial goals.

5. Don’t be afraid of the markets. There has never been a time when the markets looked completely safe, but over time the markets pay a premium for their risk and volatility.

6. Protect yourself through diversification. Make sure that your investments are well diversified over the entire spectrum of investment options. Good diversification may not give you the highest returns every year, but it will shield you from losing everything in one gamble. If you want to day-trade, set aside a small amount for that purpose, but diversify what you want to live off of in retirement.

7. Review your investments on a regular basis. If you are too busy earning the money to monitor your investments, delegate their oversight to a fee-only financial planner who will sit on your side of the table.

Unlike possums, most turtles make it across the road because they don’t stop. They may not be the fastest creatures, but their persistence and steadfast progress makes them a model of modest abilities producing remarkable results.

The financial lesson to be learned from the turtle is clear: Slow and steady wins the race!

Photo used here under Flickr Creative Commons.

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David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. Favorite number: e (2.7182818...)