Page 56 - Speedhorse, October 2021

FINANCIAL PLANNING
THE INVESTOR VERSUS THESAVER
by Cade Peterson,
Financial Planning Associate
Growing up as a kid you are taught many different values. These values usually stem from your parents and grandparents.
When it comes to finances, it is common
to form an opinion based on your parents’ experience with investing and how they made their money grow. Some people learn from their parents or grandparents that savings is important, which is a good thing. Others learn how to invest, which in my opinion, is even better. People often get the idea that as long as they save their money, they will be able to retire. This is partially true. It all depends on what they do with the money they’re saving. Here is a short story to explain the difference between a saver and an investor.
One morning, Derrick and Travis are sitting in the coffee shop like they have for several years. Derrick has been on the verge of retirement for a few years now. Travis has been retired for 2 years and is loving every second of it. As they sit and solve the world’s problems, they begin to talk about the stock market, which they haven’t discussed much before. Both men are quiet and reserved when it comes to their financial situation, but nonetheless, they begin talking about investments. It doesn’t take long before Derrick and Travis realize that they have very different views on investing in the stock market. Derrick feels that the stock market is like throwing money on the roulette table. He tells Travis that world events create too much volatility within the stock market,
and he has avoided it for most of his life. His parents were baby boomers and they
raised Derrick to save his money in the bank and pay off his debts as fast as possible. Travis comes from a different background. He was fortunate enough be advised by
his grandfather to open a small investment account when he was a teenager. He trusted his financial planner and stayed the course through all the ups and downs of the market. Now 40 years later, he has seen excellent capital appreciation with his investments due to his long-term approach. This is largely why Travis was able to retire when he did.
The reason why Derrick has been able to sustain himself financially is because he saves every dollar he makes. He doesn’t like to spend his money on anything, which is good to a certain extent, but that kind of lifestyle isn’t ideal. Travis argues the point that with the help of the stock market, he has been able to spend more freely. He and his wife
go on vacations every year and free spending is a nonissue. Derrick admits he has had a hard time competing with inflation. After all, the return on a savings account is less than 1%. Inflation has been eating away at every dollar he saved. Derrick might be saving the vast majority of his income, but the money in his account is actually depreciating every day. Travis begins to notice that Derrick is going to have a hard time retiring with his current strategy. He grabs a napkin and maps out the rule of 72 for Derrick. He takes a return of 10% for simple math. “With the rule of 72”, he explains to Derrick, “you divide 72 by the rate of return, and it will tell you how many years until your investment will double. 72/10 = 7.2. Therefore, it will
take just over 7 years to double your money with a return of 10%.” Derrick is very impressed by the illustration. As the two men continue their discussion, Travis mentions
to Derrick how important having the right financial planner can be. “When it comes
to investing, you don’t have to rely on your own understanding. It will always come with more risk than a savings account, but it creates a great opportunity for a financially free retirement. That’s the goal, right?”
WHAT’S YOUR MINDSET?
The saver mindset is extremely common, especially for older generations. The savings account seems much safer and tangible
than an investment portfolio does to many individuals. What many people fail to acknowledge is that investing in stocks
and mutual funds is an extremely liquid investment. That money is still yours and if you want it, you can get it back very easily. Another common mindset for the saver is paying off debts as fast as possible. I have talked to several people who tell me that they pay extra on their mortgage because they want to pay it off as quickly as they can. Don’t get me wrong, eliminating your debts isn’t a bad thing. What we tell clients is paying extra on your mortgage isn’t necessary in many cases. Most people are borrowing at a rate close to 3% right now. When you pay extra on your mortgage, you won’t see that money again. Instead, you could invest those extra dollars every month and profit by averaging a return of more than 3%, or whatever you are paying on your loan. If interest rates were higher, it
54 SPEEDHORSE October 2021