Wednesday, January 1, 2020
Retirement Income Starts Early (R.I.S.E.)
The R.I.S.E. Movement
New day, new year! Have you joined the R.I.S.E. Movement? Retirement Income Starts Early (R.I.S.E.) is a new movement helping people around the world better understand and prepare for financial security. Although tailored to my readers in the United States, the R.I.S.E. Movement's mathematical and psychological principles are universal.
Depending on where you live, however, there are either some distinct advantages or disadvantages to financial security. The R.I.S.E. Movement is most effective in geographies with established rules of law protecting property rights, the ability to own assets, and the ability to migrate with those assets to other regions. Simply put, the R.I.S.E. Movement works best in democracies because they typically allow for the two great advantages of compounding wealth, namely time and owning the asset.
Let's get right into it. For the vast majority of both young and older readers of this blog I have stressed the importance of "Investing Like A Farmer," and by that there are ample descriptions of the value of buying compounding assets. The R.I.S.E. Movement is an implementation of those writings unified into a financial roadmap. There are several key tenants that I think are essential to both understanding and applying to your financial preparation.
First, happiness in life (at least from a financial perspective) is positive cash flow. What is joyous is passive positive cash flow. The ultimate goal of the R.I.S.E. Movement is to help you construct a portfolio with recurring and increasing passive positive cash flow.
Second, the cavalry is not coming. You're on your own in this life in terms of creating this portfolio. It is a bad assumption to rely on a friend, relative, or (gasp) the government to bail you out in time of need. As Johnny Cash once sang "Son, this world is rough. And if a man's gonna make it, he's gotta be tough."
Third, basket weaving is underrated. College students who take basket weaving to help boost their GPA get a bad rap, because not only is basket weaving quite useful it is also quite educational. From a financial perspective, the basket we're weaving is our portfolio. It is composed of many different reeds and together they will form a strong basket to hold our wealth and generate cash flow.
When is the Best Time to Start Saving?
As most financial companies will tell you, the earlier you start saving the better. This is because one of our greatest resources in life is time. The more time you have the more compounding can occur.
The chart above helps visually illustrate the value of compounding interest, that is interest upon interest upon interest ad infinitum. The real "juice" savers get is from the compounding effect of interest. But that chart, however, only tells part of the story. It is based on a single initial lump sum that isn't touched for 20 years. Let's take a look at a little more of a real world example, in which case we start with some small sum of money and then add to it over the years. (Click to Enlarge.)
Obviously the take-away from contributing regularly over time is that a decent chunk of change can be generated assuming we get a modest rate of return and do not touch the funds thus allowing them to grow.
A HUGE challenge of course is NOT touching the growing asset base. It is virtually impossible, however, for most R.I.S.E. Movement members to accomplish this goal because life, especially over a (hopefully) very, very long time will throw significant challenges at all of us; it could be health problems, education costs, vehicle breakdowns, children, parents, taxation, etc. There are literally thousands of challenges that arise over time which require utilization of our assets. That's the major flaw in most financial roadmaps, there is zero accounting for life itself.
This brings us back to the initial question posed, when is the best time to start saving? The best time to start saving is before you are born.
Weaving the Basket
Starting to save before you are born is difficult, because you don't have many of the educational tools yet to land a job. Obviously I'm writing to all the parents out there. And grandparents. The R.I.S.E. Movement champions independence, but there are significant advantages provided to those starting out in life who are able to leapfrog twenty years into the future. And what I mean by that is nearly every wealthy family has resources put aside for their heirs; whether it is cash, gold, real estate, the family business, etc. in either a Trust Account, 529 plan, life insurance, or other mechanism. The path to creating a solid asset base that can generate cash flow starts early.
Now for those of you who weren't able to choose your parents or the country you were born in, well there is good news. If you're reading this then you probably have a vested interest in improving your lot in life, possibly to a significant degree. Read on.
As we've already discussed, time is one of the greatest commodities in life. Another one is education. Education allows people to transcend from their existing condition. This can result in a better job. A better job typically means more salary. That's a good beginning. With a decent salary excess income can be applied to building your asset base. Depending on how good of a salary, you can then start compressing time.
Wait, did he just say "compressing time?" Yes. The more excess income (income that exceeds your cost of living expenses) you have the more assets you can purchase. What is an asset anyway? An asset is something that pays you to own it. The world is full of assets just waiting to be purchased! There are dividend paying stocks, small businesses, real estate, mining claims, etc. The list goes on and on and on.
Whether young or old, there are certain tips I'd like to share in regards to "weaving your basket." Just as a little can be turned into a lot over time, the inverse is also true...namely a lot can be turned into a little quickly. The construction of your basket is going to be unique for almost all of us, but there are common elements to success.
Create moats. By that I mean have different types of assets which are not correlated, not held in the same place, and are secure. For example, "diversification" isn't just having an Index Fund. Consider owning dividend paying stocks, bonds, real estate, gold, and a small business. Together they form a sturdy basket to hold the totality of your asset base, yet are not held in the same place.
No single event should (or could) destroy your basket. Barring a meteorite or health pandemic of Biblical proportions, your basket should be able to withstand the test of time and what life has in store for you. See the paragraph directly above regarding creating moats. Chain reactions can be very, very nasty. Having liquidity on hand is a good thing (think cash money.)
Building a castle or a spaceship or a robot starts with one Lego. Remember that. Young or old we all have a certain amount of time left, act accordingly. Buy assets. Live. Add to your assets. Live. Buy more assets. Live. Use income from assets to buy more assets. Live. Get more education. Live. Use excess income to buy more assets. Live. Teach others. Live.
Your Future Starts Today
In the preamble of this post I mentioned that the R.I.S.E. Movement was tailored to my readers in the USA, but applicable to readers around the world. Each country will have its advantages and disadvantages in terms of educational opportunities, health care, and freedoms.
Generally speaking, the greater the educational opportunity, better the health care, and more freedom one has the greater your ability to harness all the facets of the R.I.S.E. Movement will be over time. Luck and hard work, however, can and often do trump many of the advantages of living in a democratic country with wealthy parents, opportunities for education, health care, and fundamental freedoms. If you have the self-discipline and motivation to harness the power of time you can compound opportunities.