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A savings account allows an account holder to set aside and earn interest on money that is not required in the immediate future. Savings accounts generally pay higher rates of interest than checking accounts, but lower interest rates as compared to treasury bills and often do not allow account holders to withdraw money via checks.
Saving Account is mostly used by the Customers to keep their excess money in bank. Bank gives limited amount of return on the amount as customer can withdraw his money anytime from the bank.
A Disciplinary TaleFixed Rate Savings
“There’s no sliding in softball”
One of my brother’s favorite sayings is, “there’s no sliding in softball.” Over the years, I have come to appreciate this phrase and use it frequently. Another way of saying the same thing is to say that there is an appropriate level of intensity that one should devote to the task at hand. My brother considers softball a purely social and recreational activity that does not merit the potential of injury or appearance of competitiveness. He would rather be called “out” than slide since he knows that he is just playing for fun. This does not mean he is uncompetitive, it means he chooses his battles wisely.
Investing is about choosing your battles wisely and this tale is about a person that understands that investing is a long-term battle that requires a game plan and simple rules that lead to financial success. It is my experience that successful investing is not a game of over-reacting. Successful investors all share the same proclivity to maintain their emotional stability. The markets and the media are forever telling you to slide or else you’ll be called “out” but as long as you recognize that you are playing a game of softball and that you set the rules of how you play the game, you can successfully avoid the siren call. If you do, you will maintain your poise when others are losing theirs. Many investors mistakenly think that the combination of stock market fluctuations and hyped media coverage means they must re-allocate or trade their portfolio based on the latest headlines. This tale instructs us otherwise.
In the summer of 1985, I was asked to provide Jack, a 22 year-old recent college graduate, with a game plan for his financial future. Jack was embarking on his first professional job in corporate America, he was single, and he wanted to be serious about his money. We discussed some simple principles and rules and wrote them down on one piece of yellow legal paper.
At the time I had 5 Guiding Principles for building wealth. I wrote these 5 principles on the yellow legal sheet of paper and underlined them. To reiterate, the principles are as follows;
1). The objective of saving money and investing is to build wealth.
2). Once wealthy, the objective is to retain your wealth.
3). Wealth is a personal state of mind and lifestyle, but to ensure that you are not off base or living in fantasyland, we must have an objective measure of wealth.
4). The objective definition of wealth is the ability to earn as much while not working, based on a rate of return of 5% per year on your money, as you can earn while working.
5). Minimize drawdown. This means lose as little as possible when losing money.
Naturally, Jack had 2 questions. He wanted to know how much to save and how to invest his savings. These are the two essential questions everyone must ask and answer when they are seeking to build wealth. Since Jack was not wealthy, he needed a plan to get there. I gave him my set of investing and saving rules. We wrote these on the yellow legal piece of paper as well and they were as follows:
1). Save 15% of every paycheck towards wealth building. Think of this money, not as your money, but picture yourself as a much older man and tell yourself that you are doing it for him. Save for old man Jack. Convince yourself that it is his money not yours.
2). If your company offers a retirement plan benefit, invest from every paycheck the maximum allowed in the company plan since tax-deferred compounding builds wealth at a faster rate than taxable compounding. Invest in your company’s tax-deferred plan before you invest in a personal taxable account.
3). If you want to save more than 15%, that is fine but do not do it at the expense of enjoying the things that make you happy. There is a fine line between over-saving and under-living.
4). Get a credit card and pay it off in full at the end of every month. Use it only for emergencies and try to pay cash as much as possible.
5). Invest 100% of your savings in stocks. Stay 100% invested in stocks until you become wealthy and then re-evaluate.
6). You can invest in individual stocks and I encourage it at a later point in life but initially, invest only in the alternatives your plan offers. They are usually broad asset categories that although they will not provide spectacular results, will provide consistent results.
7). If your company retirement plan offers at least 4 stock investment options, invest equal parts of every paycheck in no more than 4 of these choices and rebalance at the end of every year. Keep it simple. I find that more than 4 choices results in confusion.
8). Buy a house as soon as you have saved enough for a 10% down payment and buy it in a school district that allows you to send your children to a good public school.
9). Hire a Return Driven Advisor or RAD as your investment advisor. They are very hard to find however. If you can’t find one then hire a non-conflicted Fee Based Advisor or FAB and review your situation periodically or when making major decisions.
The last thing on this yellow legal piece of paper was a projection of accumulated assets over Jack’s lifetime. I explained the rule of 72 to Jack and used it to illustrate the power of compounding over time. In Jack’s case, he had 43 years to go before he reached the customary retirement age of 65. If he followed this simple plan, I anticipated he would be wealthy well before he reached retirement age.
Jack started in 1985 at an income level of $30,000/year. I estimated his income rising at a modest 3% per year and his investments performing at 8% per year over his 43-year career. I like to be conservative when making long-term estimates. I was fairly certain that both his growth in income and his rate of return would be higher than projected, but I have always found that it is better to plan for the worst. In addition, I prepared a little chart that demonstrated the power of compounding on a yearly basis over his career.
To this day, Jack remains one of my clients and I still run my advisory practice with an emphasis on returns and minimizing losses or draw downs. Over the years, he lived life. He married, moved from one city to the next, switched jobs numerous times, had children, and purchased several cars and homes. Jack’s wife, Jill, adopted the idea of saving 15% of every paycheck as well and, in her case, she saves additional money as well from every paycheck. This was particularly true before they had children.
This tale gets its disciplinary name from the way that both Jack and Jill behaved in late 2002. Their various taxable and tax-deferred stock portfolios had grown to almost $750,000 at their peak in early 2000 but in late 2002 their portfolios had dipped below the $550,000 level. The stock market had been declining for almost 30 months and people were getting nervous and ornery. The drop in their portfolio was due to the high stock or equity concentration of their portfolio; as was our plan over the last 17 years, they were still 100% invested in equities. By this time, they owned both individual equities as well as equity mutual funds. They had suffered a temporary setback over the last two and a half years and called to schedule an appointment to discuss our future strategy.
At our meeting, I once again explained that 25% declines in the stock market have happened multiple times and that I expect they will continue to happen as long as stock markets exist. I further explained that the two and a half year period that we had experienced and might still be experiencing was an unusually large decline in both duration and percentage drop from the market peak but that it was not outside the boundaries of historical declines and advised them to maintain their portfolio allocation. I also explained that on a relative basis they had performed quite well.
Naturally, I was feeling pretty defensive in late 2002, as most financial advisors probably were. I was beginning to question my own advice and convictions, especially since every analyst and commentator that appeared on TV or print espoused the virtues of safety and a diversified stock, bond, and cash portfolio. Short-term safety in the form of bonds and cash was the in vogue thing to recommend in late 2002 and we all know that these analysts always possess perfect hindsight, right? They always see perfectly in the rear view mirror. In the meantime, Jack and Jill, as well as all my other wealth-building clients, were fully invested in equities and we were counting our losses almost every month. It was a very gut-wrenching period and one I learned much from. Nevertheless, I did not waiver in my recommendation that a couple in their mid to late 30’s should maintain their retirement/wealth building investments in stocks until such time as they are wealthy.
I was pleasantly surprised the day after our meeting to receive a fax from Jack. He had that night pulled out the one page legal sheet that I had hand written so many years ago and sent me a copy of it along with a note that said, “Keep up the good work, we are way ahead of the plan.” I looked at the fax and realized that I had projected that he would have considerably less than the approximately $550,000 he had by 2002. This made my day. To this day, I think Jack did this because he could sense the apprehension in my voice as I recommended that he maintain his aggressive all stock portfolio. In fact, Jack was well ahead of plan by a considerable margin, despite the large decline. It was also very evident that the plan was working and that the next stock market move up, or perhaps the one after that, would move this couple closer to their wealth goal. As of this writing, in late 2008, the equity markets have recovered from the lows of October 2002, they then peaked in October of 2007 and we are in the midst of another major stock market decline. Jack and Jill are still aggressively invested in stocks though they no longer need to be 100% invested in stocks since they reached some wealth milestones along the way.
What was truly amazing was that here was a plan that had been devised on very short notice more than 17 years ago and that the client still had the original piece of paper and had stuck to the plan. The financial plan was good, not great. But more importantly, it was executed perfectly and with discipline, thus the title of this tale. I have seen people pay thousands of dollars for financial plans that are elaborate and encompass so much detail that it makes even my head spin. However, they do not execute the plan, and thus, the plan becomes useless. This leads to one of my financial maxims, “It’s better to execute a good plan well than to execute a great plan poorly.” Savings Account