By Alan Steel
Sure, we all know broccoli is good for us. It’s the sort of thing we should be eating regularly if we want a long and healthy life, right?
But if we’re given the choice between broccoli and chocolate…?
Well, let’s face it, chocolate is tastier. And the benefits of chocolate happen right now, so we’re all a bit more inclined choose like Homer Simpson when faced with a donut: Mmmmmm…chocolate….
And anyway, we can always get round to eating broccoli later, eh?
Well, that same thought process applies to money too.
Eat Your Broccoli…
Broccoli is like the long-term, savings plan, pension-focused, wealthy later, don’t-buy-a-new-car-every-year diet.
Unfortunately, you don’t often see the benefits for a while.
In fact sometimes they seem invisible, because all those broccoli / long-term choices you made meant you never got diabetes or went bankrupt.
It can literally be hard to swallow at times.
That’s because we’re all human and we all look around at what other people are doing.
Often the value of “broccoli” only gets real in your adviser’s office, a colleague winds up in a hospital bed, or someone is forced to sell up, downsize or foreclose due to an overabundance of “chocolate” in their diets (great collection of holiday photos, though).
In fact, it gets even harder when the headlines suggest there’s really nothing worth investing in.
And let’s face it, if you’re understanding is that pension plans are rubbish then what’s the point?
The Magic Number of the Financial Universe
Well that’s where the magic number of 72 comes in handy, and if you’re looking for perspective here’s a good place to start.
Here’s how it works: Take any return on your money after tax, divide that into 72, and that’ll tell you how many years it takes to double it.
Want an example?
So if you’re getting 3% (72 divided by 3) in a deposit account after tax (and by the way, the norm right now is 1% or less) it will take you 24 years to double the money.
At the aforementioned 1% rate, it will take you 72 years (72 divided by 1) to double your money.
But if you can increase that return to 10%, you can then double your money in 7 years.
At 14% or above you’re doubling the money every 5 years.
Show Me That Money
So where do you get returns like that?
Well, for a start not in a bank. We’ve been in a period of historically low interest rates since the recession. Those rates are handed down to depositors. And that means bank deposit rates are at historically low levels too.
How about bond funds? Well, there are options out there right now that will guarantee to return LESS than what you put in. That’s not a misprint. And people are buying them.
I have no words that can explain that type of thinking.
However, if we take a trip back to basics you’ll find that Pensions are exempt from Capital Gains Tax. Contributions going in are tax-relieved against the highest rate of tax.
So for a 40% tax payer that’s a 67% uplift in your investment from day one. I appreciate there’s some tax paid on reinvested dividends within the pension fund, but that’s not that bad.
Link the rule of 72 with these tax benefits you get a double whammy of good news.
Think of broccoli that tastes like chocolate.
And all you need to do is speak to someone who can tell you how to get it.