Last week I showed you the financial planning formula. Here it is again:

WEALTH = $$$ X YEARS X % (AKA RATE OF RETURN)

Pop quiz: of the four factors in our formula, how many of them are variable?

Wrong.

The reality is we can really only control one of the four factors in our formula:

  • How long we work, or # of Years? We could get laid off as we near retirement, our profession could become obsolete (AI, technology, etc), or we could get sick/injured and be unable to work
  • The rate of return we earn? We’ll hit on this in a little bit but spoiler alert…NOT IN OUR CONTROL.

Still better than Couple A.

I’ll save you the graphic if we dropped it down to 2% which is roughly what a bank CD is paying these days. 2% for 20 years would have resulted in nearly $1.475m for Couple B.

Still better than Couple A.

Now Couple B is really feeling risk averse and they decide to just park their cash in a bank account that pays them 1% for the next 20 years. Basically a money market account today, right? And after 20 years they still have more money than Couple A with roughly $1.325m.

Like a broken record over here but…still better than Couple A.

For our last example I won’t even show you the graphic because Couple B is going to earn 0% on their money. You heard me correctly.

$60,000 X 20 YEARS = $1,200,000

Say it with me now…still better than Couple A.

  • When your rate of savings is lower, you’re essentially forced into taking more risk (read: chasing higher rates of return)
  • When you’re chasing higher rates of return, you are not relying on financial factors in your control
  • increased risk is an option not a requirement
  • we’re focusing on a financial factor (rate of savings) we can control
  • HIGHER RATES OF SAVING BETTER ALLOW US, IF WE CHOOSE, TO REDUCE RISK WHEN IT COMES TO OUR INVESTMENTS AND STILL ACHIEVE FAVORABLE OUTCOMES.
  • RATE OF RETURN IS NOT A FINANCIAL FACTOR WE CAN CONTROL. WE DO NOT DECIDE THE RATE OF RETURN OUR MONEY RECEIVES WHEN WE INVEST IN THE MARKET. (NOTE: SOME PEOPLE WILL TELL YOU THEY CAN DO THIS. THEY PROBABLY ALSO HAVE BEACHFRONT PROPERTY THEY WANT TO SELL YOU, TOO.)

Focus on the factors you can control

*Hypothetical examples are not intended to suggest a particular course of action or represent the performance of any particular financial product or security.

I like to write about what happens in our lives and how it can relate to our financial lives. Not always but most of the time. So keep checking in.

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