Powerful Financial Planning Tools

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Powerful Financial Planning Tools: What We Can Learn from the Monetary Shock

By Dr. Mark Skousen, Investment U Advisory Panelist
Friday, September 9, 2005: Issue #467

“America undersaves on a massive scale.” – Peter Drucker, world’s # 1 management guru

For the past 20 years, first at Rollins College and then Columbia University, I have taught students an uncomfortable truth – most people under-save and over-spend.

The vast majority of Americans live beyond their means, from paycheck to paycheck, and credit card to credit card. So, when a national crisis hits, most Americans are ill prepared to cope.

Here’s the scary part: According to the latest data, putting aside funds for a rainy day, a new business venture, or the stock market, is completely out of fashion.

Americans spend all their paychecks on current consumption, or borrow to spend even more. Almost everybody these days, it seems, is cash poor.

As the graph shows below, the personal savings rate has been declining since 1980, and fell to zero – zero – in June.

Powerful Financial Planning Tools, Chart 1: The Decline of Personal Savings

But I had no idea how bad it was until Katrina hit the Gulf coast. I was shocked by how utterly and completely financially unprepared most people were. They had no cash, no assets, and within 24 hours, no roof over their heads and a huge mortgage they couldn’t pay down for lack of a job.

Fortunately, I have some good news…

The Most Powerful Financial Planning Tool Going

My favorite among these financial planning tools is called “triple compounding.”

I discovered this principle studying the successful investors and entrepreneurs on the Forbes 400 list, from old-timers like J. Paul Getty and Joe Kennedy, to today’s billionaires like Warren Buffett and Bill Gates. Note that none of these billionaires started out with a silver spoon in their mouth. They made it starting from scratch.

What do they do to become richer every year and stay out of trouble?

They have learned and adopted the #1 “big easy” rule of investing: Establish an institutional method of building wealth automatically, every year, without exception.

I have personally used this powerful system to pay for my children’s education, to take care of emergencies, and to build financial independence. It works!

And I always have plenty of cash around in case of an emergency or a national crisis.

So How Does the ‘Triple Compounding’ Financial Planning Tool Work?

Triple compounding is achieved through what is known as an “Automatic Investment Plan” (AIP). Basically, you automatically set aside a specific amount of funds from your checking account or paycheck, and invest it in a good mutual fund or two that are likely to increase in value over time.

You can start with as little as $100 a month, or as much as $10,000 a month. The finances are completely up to you. But I recommend you invest 10% of your-take home pay. (I actually save more, and some of my financial planning / investment advisor friends save up to 35% of their income.)

Setting up an AIP is very easy and almost every brokerage firm offers it. I have AIPs for myself and my children at Charles Schwab & Co., where there’s no charge to set it up. To see how easy it is, go to http://www.schwab.com, click on “Trading & Investing,” then “Account Types,” and finally click on “Automatic Investing.” Schwab offers more than 1,000 no-load mutual funds in their AIPs.

Several of my favorite no-load funds are available for AIPs, such as:

The Masters 100 Fund (MOFQX)
Fidelity Select Defense Fund (FSDAX), and
The U.S. Global Resource Fund (PSPFX).

Your account can grow very fast for three reasons: First, you are adding to your account every month. Second, if you invest in growth mutual funds, your account’s NAV (net asset value) is likely to grow over time. And third, all dividends and distributions are automatically reinvested.

That’s why triple compounding is one of the most robust financial planning tools around.

Exactly How Fast Could Your Account Grow?

Let’s use a conservative example with our triple compounding method. Suppose you set aside $1,000 a month and invest it in a mutual fund that returns 8% a year for the next 30 years.

At the end of the first year, you will have $13,533 (rounded to the nearest dollar). Then

Year 2 – $27,106
Year 5 – $74,966
Year 10 – $185,165
Year 20 – $593,947
Year 30 – $1,501,295

If you can do this at only 8% a year compounding, imagine how much money you can make if you earned 10% or 15% a year!

Remember, you can never save too much. A regular Automatic Investment Plan, with its triple compounding features, is the fastest, easiest financial planning tool I know to build independent wealth.

Good trading, AEIOU,

Mark

Today’s Investment U Cribsheet

This week I am at the Las Vegas Gold Show at the Mirage Hotel and Casino, where I’ve been meeting personally with Jim Dines, Rick Rule and other commodity experts to talk about the best prospects in gold, oil and gas, and uranium. It’s also where our own Steve Sjuggerud is sharing what he calls the “secret currency,” which I will soon report to Investment U subscribers.
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