When it comes to saving for your big goals, you're probably wondering: how much do you need to save? It's a question that keeps you up at night, and rightfully so. But let me tell you, figuring out the exact amount can be a real pain in the ass.
Here's the deal. You need to know how much you need annually, which you can then divide by 4%. Yeah, I know it sounds like some fancy math stuff, but bear with me. Then, plug that number into a compound calculator, along with an interest rate and the time it'll take to reach your goal. Voila! You'll get the monthly savings target.
But here's where things get tricky. Can you really rely on that number? It's a valid question. Let's break it down. That 4% calculation assumes you'll be withdrawing money from your account during retirement over a25-year period. But what if you live longer? Like, past 90 years old? Well, my friend, you're screwed. Your money will run out, and your golden years will turn into a broke-ass nightmare.
Now, I know what some people will say. "Hey, Aaron, just invest that money and get a 4% return forever!" Yeah, that’s just a pipe dream. The market doesn't follow a straight path to success. It's more like a crazy roller coaster ride. So, your million bucks could shrink, and suddenly your dream of a steady $40,000 yearly income is shattered. Here in Canada, that assuming also may not work. If you have your money invested all in an RRSP. Guess what? You have to take out more than 4% each year. Now things are more complicated with higher withdrawals, opening an extra account, reinvesting that money. Its just a paperwork headache.
And let's not forget about the assumed return rate over the years. Truth is, nobody really knows what will happen in the future with stocks, mutual funds, or ETFs. It's all just guesswork, my friend. Plus, if you start changing your investment strategy out of FOMO, you might end up with lower returns. Just take a look at how the average investor performs. Spoiler alert: they're not great at it.
But wait, there's more! Those calculators give you the freedom to choose whatever interest rate you damn well please. If you crank it up from 6% to 10%, your required monthly savings will drop like crazy. Sounds awesome, right? Well, not so fast. Taking on more risk assumes you can actually handle it and that you'll get that magical higher return. But if you don't, or if panic strikes, your savings could drop faster than my bank account on a shopping spree. Not a pretty sight, my friend.
Alright, enough of the gloom and doom. Let's switch gears to something more uplifting, shall we? When you run the numbers using a lower rate of return, you might be shocked to find out that you need to save $500 or more each month for the next few decades. And I get it, you're probably thinking, "Where am I gonna find that kind of money?" I hear you, my friend. Mortgage payments, car loans, diapers, clothes, groceries - it all adds up. But fear not, because I've got your back.
You don't have to start with $500 right off the bat. Nope, not at all. Begin with a humble $50 today, and you can still reach your goal. Iknow, I know, you're thinking, "Aaron, get some sleep. $50 a month won't cut it." And you're right, it won't.
But here's the kicker - time is on your side. Kids grow up and move out, groceries get cheaper, that mortgage payment eventually disappears, and (fingers crossed) you start earning more moolah. All these factors mean that you can start small now and increase your monthly savings in a few years. You could be shoving thousands of dollars into that savings account each month! Trust me, there's an alternative strategy to catch up.
So where does all this leave you? Those calculators are a decent starting point, but they're not the holy grail. I tweak them based on your unique situation and keep an eye on your cash flow over time. So don't freak out if you don't have $500 a month to spare right now. And for the love of all things financial, don't go boosting the rates of return to compensate. That's just plain foolish. Instead, use that $500 a month as a goal. Work on improving your cash flow, cut back on unnecessary spending, and focus on that smaller number first.
And hey, if you still have questions and need some guidance, I'm here for you, my friend. Let's chat for 30 minutes, free of charge. We'll dig into your numbers, your cash flow, and figure out how the hell you can make it happen, even starting with just $50 a month. Believe me, we'll get you there.
