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Accumulation basics

Time is on the side of those who begin building wealth when they are young

Accumulation basics

A comprehensive financial plan addresses the accumulation, preservation, and transfer of money. A godly person gives money wisely and faithfully leaves an inheritance-but both transfer and preservation first require accumulation. Let's look at three guiding principles concerning accumulation: defining goals, using time wisely, and finding the right blend of risk and reward.

Delineating goals and objectives begins the process of seeking a specific path to each goal. "Retirement" savings (defined as having sufficient funds to meet needs once earnings decline) is perhaps the most common financial goal Americans face today. Given the rapidly escalating prices of college tuition, educational savings for kids (or grandkids) is another common goal.

The need to set goals may be obvious, but people with a distant goal often wait too long to begin accumulating-and the one resource we all have, but often fail to use, is time. Albert Einstein called compounding the "eighth wonder of the world," yet when we procrastinate we squander much of this God-created gift. The idea here is to take advantage of mathematics-to set aside some amount of money and then to benefit from compounding over time.

Consider the illustration below. You'll see that one person put in four times as much money as the other, yet they both end up with the same amount of money (assuming that each has a 9 percent rate of return). A higher rate of return would be even more dramatic, a lower rate less so, but the overall lesson is simple: The sooner we begin to accumulate a savings and investment nest egg, the better.

We need to share this lesson with our children as soon as they can understand it. Young people often feel that they are the least qualified to begin saving and investing, especially given financial pressures as they begin careers, pay off student loans, and start families. But young people have time on their side-and they should understand that time really is money when it comes to accumulation.

Another vital issue is the rate of return (also known as the "performance" of the investments). Consider this chart:

The chart shows the obvious reality that higher returns trump lower returns-and it stands to reason that an investor seeking a 12 percent return is likely to take on higher risk than an investor seeking a 2 percent return. Returns cannot be spoken of without also discussing their levels of risk. My next column will look at what time-tested strategies are available to good stewards to optimize their return, yet to do so with an appropriate and responsible level of risk.

David L. Bahnsen

David L. Bahnsen

David is a financial advisor and frequent WORLD Radio guest. He serves as chief investment officer of The Bahnsen Group, appears on CNBC, Bloomberg, and Fox Business, and regularly contributes to National Review and Forbes. David has written several books including The Case for Dividend Growth: Investing in a Post-Crisis World. David resides with his wife and three children in Newport Beach, Calif. and New York City.