Saving Money: The Safest, Easiest, Most Effective Way to Jumpstart Your Portfolio
by Alexander Green, Chairman, Investment U; Investment Director, The Oxford Club
The Investment U e-Letter: Issue #735
Monday, November 26, 2007

In 1985, I read an article in the business section of The Orlando Sentinel that changed the direction of my life.
 
The headline trumpeted the fact that the average stockbroker in the U.S. was making $168,000 a year. I read the article carefully. I tore it out. And then read it again… and again.
 
If the average stockbroker makes $168,000, I thought to myself, what do the good ones make? It must be a bundle, I imagined. (Not that $168,000 in 1985 wasn’t a princely sum already.)
 
Within weeks I was working as a stockbroker in a local firm – and quickly became one of the “good ones.” My income was high. And as a young man still in my 20s, I didn’t show much restraint when it came to spending.
 
Within a year I had bought a brand new lakefront house, a ski boat, a Jaguar XJ-6, and all the other toys. 
 
When my friends came over for parties – which were frequent – most of them assumed I was rich. I was nothing of the sort. A big reason was that saving money was not one of my priorities.
 
Wealth is not the same thing as income. If you earn a lot of money and blow it every year, you’re not getting rich. You’re just living high. Wealth is what you accumulate, not what you spend. 

7 Ways to Become Wealthy

As Thomas T. Stanley and William D. Danko wrote over a decade ago in “The Millionaire Next Door”:
 
Affluent people typically follow a lifestyle conducive to accumulating money. In the course of our investigations, we discovered seven common denominators among those who build wealth successfully.

1. They live well below their means.
2. They allocate their time, energy, and money efficiently, in ways conducive to building wealth.
3. They believe that financial independence is more important than displaying high social status.
4. Their parents did not provide economic outpatient care.
5. Their adult children are economically self-sufficient.
6. They are proficient in targeting market opportunities.
7. They chose the right occupation.

In short, they discovered that most millionaires don’t inherit their wealth or hit a sudden jackpot.  Most of them accumulate their wealth gradually, by earning as much as they can, spending as little as they can, and religiously saving the difference.

Saving Money and Money Compounding
 
But do you really need to keep doing this even as your investment portfolio swells?
 
Absolutely. Never underestimate the firepower of money compounding. 
 
For example, let’s say you’ve accumulated a portfolio worth $100,000. If it compounds at no more than the long-term return of the S&P 500 – 11% a year – it will be worth $1,358,000 in 25 years.
 
Not bad. But if you added $500 a month along the way, it would grow to more than $2.1 million. 
 
“Saving more” sounds awfully old-fashioned, I know. But most of us are not talented enough to start the next great computer company in our garage or play point guard for the Knicks. So it’s unreasonable to count on a sudden windfall.
 
Unlike the performance of the stock market, saving is something that’s under your control. It’s guaranteed to make a significant impact on the long-term value of your portfolio. And – trust me – it’s a whole lot better than trying something heroic with options, futures or penny stocks. 
 
In short, regular saving remains the safest, easiest and most effective way to jumpstart your portfolio. 

Good saving,

Alex

Today’s Investment U Crib Sheet

There are a ton of options when it comes to setting up an automatic savings plan. Here are two ideas…

1. You can set up an account with Vanguard, the king of low-cost, diversified investing, and make systematic deposits. And you can do it all online.

The Vanguard Prime Money Market Fund (VMMXX) is a great place for your cash holdings. It yields 4.75% right now, and, of course, it’s liquid.

Since 1975, the fund has posted an average annual return of 6.47%.

2. To park your cash outside of the U.S. dollar, check out the WorldCurrency CDs and Deposit Accounts offered by EverBank…

You can buy euros, yen, Swiss francs, Australian and New Zealand dollars, British pounds… and then collect interest in those currencies. There are no monthly fees. And you can apply online. Here are all the details.

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