We all have goals for our life and career, but for our financial future they may be more like aspirations with no clear steps on how to achieve them.
Begin with the end
Imagine you were going to drive to a far-away city. How would you choose the best route to take? You would actually start at the destination and work your way back to your location. Financial goals are even easier. Basically, it comes down to what you want at the end, what you have to put into it and the rate of return you can probably achieve.
Now, this is not just for retirement. This could be you 20 years from now.
It's best to start out with easy numbers to make the goals more achievable. Using the ASIC MoneySmart website's compound interest calculator, I found out that if you wanted to make $500,000, you could do it by –
> starting out with $1,000 now and
> saving an extra $1,000 a month for 20 years at 10% interest.
You would have saved about $240,000 and made $525,000 in total interest for a whopping $765,000.
How to do it by investing
Now, no bank is going to pay you anywhere near 10% interest, but it is possible to make gains like that (and even more) through share investing. Share prices can rise and fall dramatically, so having stable high-yield stocks that could give you 5% – 6% returns on your initial investment is essential.
With that much, the stock only has to rise 5% or more each year to hit your 10% return mark. The great thing is that quality dividend stocks usually raise their dividend payments over time, so the returns could be higher yet!
Time, time, time…
This is a "get rich slowly" plan that can only work by getting interest on your interest through compounding. Just like doubling a number (1,2,4,8,16…) is slow at the beginning, but the totals seem to jump up before too long.
Two stocks to start building your financial success
For long-term returns, boring is beautiful, so Insurance Australia Group Limited (ASX: IAG) would be one of my picks because it offers a fully franked 5.9% dividend yield and has a good track record for increasing the dividend over the past 10 years.
Next, having a fast grower like job search website operator SEEK Limited (ASX: SEK) would be good for near-term dividend growth. Its yield is 1.5% fully franked, yet as it becomes a mature business, it will probably increase its dividend payout ratio. That plus the regular earnings growth should increase the dividend payment and give you a better return on your investment.
