How much is rich?

I never considered myself rich.  Rich people can afford fancy cars, go on long vacations, live in big houses and so on.  I have always lived a fairly simple life, though one that is better than many.  Whenever I see books about how to get rich, whether quick or slow, I wonder.  How do I know when I am rich?  Do I have to be Bill Gates rich or just one of those folks living in one of those big houses I used to go to for trick-or-treating on Halloween?  Were they rich or just in a lot of debt?

 

I have done taxes off and on for people for the last five years and so I have seen how much money each of them earns.  Surprisingly, often the ones with the smallest incomes were the most generous with their donations, especially to church, and far happier.  Those in the six figure income were often concerned about taxes and debt.  Whereas the families making just enough to not be on welfare were often more comfortable.  They had no illusions of driving a BMW or living in a six bedroom house.  They were happy to know they could put food on the table and have a roof over their head.  Once I retire, I would be happy to be in the latter group, though I might be a bit more demanding on the food and roof.

 

 What I need is to know I can leave my job someday and know that I have an income I can depend on.  Perhaps I can have some left over that I can invest to see if I can make it grow more.  And then I might want to be able to travel a bit more, eat out occasionally, and know I have a car that runs.  Is that too much to ask?  To get there I have to plan and save. 

 

To plan, I start with finding places I can put my money where it can grow.  But how much does it need to grow and how much to I have to add to it each month to reach my goal?  Money grows by either giving it to a bank to pay me savings interest or buying some sort of investment that increases in value over time.  What about taxes?

 

We hear about putting our money into something with tax-free growth, or at least tax-deferred growth. These come in the form of 401k's, Roth IRA, and other investment vehicles.  I could put my money into CDs or savings accounts, but those grow without tax protection.  So what?  So think about this.

 

If you were to take one dollar and have it double tax free every year for 20 years, at the end, you would have over $1 million.  Hard to believe?  Get out your calculators and figure 2 to the 19th power.  Cool, huh?  But if you were to tax that growth every year as your savings account would be taxed, your total at the end of 20 years would be about $27,000.  Which do you prefer?

 

Money growth is measured by how often it doubles.  Years ago, Albert Einstein used to talk about the power of compound interest, the money you get when you receive interest and then more interest on your earnings.  He talked about the Rule of 72.  That says that if you take the interest rate you are getting and divide it into 72, you will get the number of years it will take to double.  For instance, if you were getting 10 percent interest, you know it will take 7.2 years for your money to double.  Banks right now are paying about 1% if you can get it.  How long would that take to double your money?  72 years.  I know, then, that I need to find something that doubles my money quickly and protects the growth from taxes. 

 

 I had some savings in my 401k.  After I left the job I had it grow, I rolled it over to an IRA to get even more control over it. And then the market crashed.  I lost almost half my value in just a few months.  Granted, much of that value has returned, but the overall growth over ten years was, at best, 1%.  What does that tell you? 

 

And this is where my friend came to my assistance.