Making Money Simple

The Complete Guide to Getting Your Financial House in Order and Keeping It That Way Forever

Peter Lazaroff

• Publisher: Wiley
• Year: 2019
• ISBN:
  9781119537854
• Edition: 1
• Topic: Personal Development
• Subtopic: Personal Finance

Simplify your financial life and ensure financial success into the future

Feeling paralyzed by the overwhelming number of complex decisions you need to make with your money?

You don't need to be an expert to achieve financial freedom. You just need a framework that makes the right choices simple and easy to make. Making Money Simple provides that much-needed process so you can get on the right track to long-term financial security.

This valuable resource provides a solid foundation for all the nuanced personal finance decisions you need to make as you go through your career, hit major life milestones, and look to grow wealth. It's a blueprint for financial achievement—even through tough-to-navigate situations where there are no clear-cut rules.

After you read Making Money Simple, you'll be able to create your personal plan for success using proven wealth management methods and real-world financial strategies. From basic financial principles to advanced investing techniques, you'll get comprehensive coverage of fundamental financial topics with easy-to-follow advice from author Peter Lazaroff, who draws from his expertise as the Chief Investment Officer of a multi-billion-dollar wealth management firm to give you the tools you need to simplify your financial situation and make the right moves at every opportunity.

Getting your finances in order doesn't have to be hard. It doesn't require fancy, convoluted investment strategies. Nor does it require keeping track of detailed spreadsheets. You just need this step-by-step process to get your financial house in order and keep it that way forever.

It doesn't matter what your specific situation is. We all need to understand our money—and what to do with it. Making Money Simple shows you how to:

• Develop clear financial goals and plan for your future
• Understand the three crucial elements of building a strong financial house
• Implement effective investment strategies to grow your wealth and avoid costly mistakes
• Learn ten smart questions to ask when hiring financial professionals

For those seeking to secure a solid financial future, Making Money Simple: A Complete Guide to Getting Your Financial House in Order and Keeping It That Way Forever is the roadmap to get you there.

CHAPTER ONE
The Power of Time and Compounding

The most powerful tool you have for reaching your goals is time.

Time mixed with the power of compounding is the most potent combination for wealth creation. Compound interest allows you to grow wealth faster by earning a return on your past returns. This isn't a linear relationship; it's exponential, and that power is the most underappreciated component of a financial plan. The human brain simply isn't good at visualizing exponential things, which may explain why it's so difficult to fully appreciate a plan that fully leverages the power of compounding.

Let's try to fix that.

Imagine you take a sheet of standard printer paper with a thickness of 0.1 mm. Fold it over once and it gets twice as thick. Fold it again and you've doubled the thickness of the paper again; two folds make the paper four times as thick. Fold it a third time and now the paper is eight times as thick. If you could fold that piece of paper 50 times, the paper would stretch 95 million miles or approximately the distance from Earth to the sun. At 100 folds, it matches the radius of the universe (see Figure 1.1).

FIGURE 1.1 THE THICKNESS OF A FOLDED PIECE OF PAPER

Unfortunately, it isn't possible to fold a piece of paper more than eight times (try, I dare you). But the underlying math of repeatedly doubling the thickness of paper is exciting when we apply the same exponential growth to your savings.

THE POWER OF COMPOUND INTEREST

How many times can you double your money during your lifetime? That depends on your age and rate of return. With these inputs, we can use a rule of thumb known as “The Rule of 72.” Simply assume a reasonable rate of return for planning purposes (between 7 percent and 9 percent over a multidecade time period) and divide 72 by that rate. This calculates the period of time it would take for your money to double.¹

To make the math nice and even, let's say we earn an 8 percent return on your money. According to the Rule of 72, it takes nine years to double your money (72 ÷ 8 = 9). Ready for the compounding part? (See Figure 1.2.)

FIGURE 1.2 GROWTH OF $10,000 INVESTMENT WITH AN 8 PERCENT RETURN: INITIAL INVESTMENT VERSUS CUMULATIVE COMPOUND INTEREST

Let's start with $10,000 and continue to assume we earn a return of 8 percent. After nine years, the Rule of 72 tells us we will have $20,000. It should seem obvious that the $20,000 then takes another nine years to double, so we will have $40,000 after 18 years. As we will see in a moment, the earnings on interest becomes disproportionately larger than the earnings on the initial investment.

To see how good planning can maximize the benefit of compound interest, we can draw from Benjamin Franklin's financial plan. At his death, Franklin's will left 1,000 pounds sterling (then worth about $9,000) to his adopted home of Philadelphia and his native city, Boston.²

Franklin wanted trustees to loan the money to apprentices, much in the same way he received assistance early in his career. His will also stipulated that the interest collected from the loans should stay invested so it could compound over time. After 100 years, both cities could withdraw 75 percent of the funds to use for infrastructure projects that would improve the quality of life for those living in these cities like bridges, roads, water systems, and public buildings. Then in another 100 years, the cities could withdraw the remaining balance for additional infrastructure and city betterment projects.

Franklin estimated a 5 percent annual rate of returns from the loans. It turned out to be 4 percent. He was off by one percentage point, but remember that financial success depends less on marginally higher returns than it does on saving and time. This case serves as a perfect example of this phenomenon.

The cities made their first withdrawals in 1890. The fund grew from Franklin's initial contribution of $9,000 to $500,000 over a period of 100 years (that's about $13 million in today's dollars). When the cities could make their second withdrawal in 1990, they gained access to another $6.5 million (or $12 million in today's dollars). Franklin understood the power of compounding. He knew that good planning and time were the essential ingredients to having it work in your favor.

You probably won't get to work with a 100‐year time horizon, but you will get several decades to allow your investments to earn compound returns if you start saving now. The way Franklin structured his will provides a great illustration of how thoughtful planning and time can best capture the power of compounding. The more time you hav...