Invest or save? What are some options?

Compound interest is still a great invention

Look at this calculation. If you start investing today at the rate of, say, $100 a month for your newborn who arrived at some crazy hour this morning, and who, when he grows up, takes over and continues that same investment until he reaches the age of 50, it will be worth how much?

There’s a retirement fund

Well, if in these miserable and chaotic financial times, you can achieve an average return of just 6% per year, the money you invest each month will accumulate into a cool $360,000 in 50 years. If you can manage to squeeze a 10% annual return, as you could have in the years before today, that $100 a month will turn into a staggering $1.4 million. This morning’s baby, now a grey-haired, middle aged man, will surely bless his wise old father. May you still be there and be at the celebration! Not bad for $100 a month! A sum like that would make your retirement – and mine- a lot brighter!

What’s happening to returns?

Interest on invested money seems to drop all the time until I can hardly scratch a couple of miserable percent at the bank. Is this how things are going to be for the next generation? Is interest on money saved in the bank a thing of the past, something that future generations will only read about in those email fact sheets that keep buzzing around?

And what of stock market returns? They may be lower than they have been in the past. Certainly Warren Buffett expects them to be, but they may be the best one can do anytime in the next 50 years. The reason, it is explained, is that “all wealth is created by business, and all other assets that people might use for investments have to be paid for from the proceeds of business, all returns from bank accounts come from the proceeds of businesses that borrow money, etc.”

If the norm used to be 12 percent, then 6 percent is probably realistic for our savings exercise above and hopefully one will be able to achieve that. But it’s clear that everything has changed and our children will not be living in the same world as their parents.

Think about this. $100 per month may be within your reach and the interest rates may be better than 6 percent.

You can never tell

When I was a young engineer in the 60’s, two architects opened a practice in the adjoining offices. On the very first day they swore to invest 10 percent of every fee they received in one ounce gold coins, which were then selling at about $30 each. I moved away and forgot all about them. Years later their names came up in a conversation and I remembered the gold coin promise. I inquired about them and learned that one of them was retired and living in a villa he bought in Spain back in the seventies. The price of gold soared in the 70’s reaching almost $700 an ounce! If these clever architects had kept on buying as they had promised to do, they became wealthy men.

I, on the other hand, discovered Payday Loans and I manage to stay retired that way.