Once you have your Number calculated, you know the size of the mountain you’re attempting to climb. Of course, you also need to know how steep that mountain is – the “gradient of the curve”, since that will decide what kind of growth rate you require.
For example, if you have enough railroad track, a train can climb any mountain, regardless of it’s height. The track just can’t be steep – which is why you need more of it!
If you meander around the mountain, slowly moving up with each trip around instead of going from A to B on a vertical incline, the train can eventually make it to the top – it just won’t happen very quickly.
That’s why the size of your Number shouldn’t phase you. The gradient of the curve, or the steepness of your mountain is what should!
You want a million dollars? Buy a $100 unit in a low-cost Index Fund and wait 83 years.
Want a million in today’s buying power? Add another 38 years. Did you want $5 million in today’s buying power? Simply wait 21 years more!
Despite all of the hard work that you’ve been putting into your savings strategy, the chances are – as you’ve probably already discovered – it won’t get you to your Number!
This is simply because the returns that you are likely to get from putting your money in The Bank (2% to 5%) or The Stock Market (8% to 12%) – at least, in the ways that we’ve discussed so far – go nowhere near the your required annual compound growth rate (that you found from the last KLE).
It’s not the size of the mountain that presents the problem, it’s the steepness that you need to climb to reach the top. It’s not how much your Number ends up being – it’s how soon you want to achieve it. The Average Compound Growth Rate (KLE67) is a measure of how steep the financial mountain is that you are climbing.
When you know this rate, you can determine whether you need a financial train, car or helicopter to get you to the top in time!
So, how big is your mountain?
More importantly, how steep is the gradient? Are you prepared to try a new mode of transport to reach your Number, if that is what is required?
For example, if you’re currently investing in CD’s but you need a 30% growth rate – are you willing to change your strategy to include starting a business or actively managed and traded stocks? If not, you’ll either need to find a smaller mountain (deflate your expected lifestyle) or simply give yourself some more time!
Here is a chart giving you the typical growth rate for each type of activity, and the investment options required to generate that growth rate:
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Task 1: What ‘growth engine’ had you previously chosen to be your primary means to reach your Number?
Task 2: What ‘growth engine’ do you now think you will need?