Ten Steps to Financial Freedom

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The Motley Fool
T
O
E
DUCATE
,
A
MUSE
& E
NRICH
THE TEN STEPS TO
THE TEN STEPS TO
FINANCIAL FREEDOM
FINANCIAL FREEDOM
The Motley Fool’s Ten Steps
Page 2
Introduction - What is
Foolishness?
Welcome to the Motley Fool. You may not realise it yet, but you’ve
just found your ticket to inancial independence. The kind of independ-
ence that might enable you to retire early, buy that second home on the
Costa Blanca (oh all right then, the Bahamas), or ly to New York on
Concorde for a long weekend whenever you feel like it.
As a newcomer, you might be wondering just what on earth all this
“Motley Fool” stuff is and why you should spend any time here. You
were looking for information about money (right?) and
now you’re staring a court jester directly in the eye.
This probably strikes you as a little odd. That’s no sur-
prise, but we reckon that everyone talks about money
far too earnestly. It’s very deinitely a serious matter,
but people are often more interested in sounding like
they know what they’re talking about than in actually
explaining anything. The court jesters of the past rec-
ognised that to understand certain things, you had
to strip off an outer layer of pomposity. With this
approach, their humour instructed as it amused. In fact, it’s been said
that these Fools were the only members of the Royal entourage who
could tell the truth without having their heads lopped off.
This is the mission of the Motley Fool – to educate, amuse and
enrich. We want to help you to make smart decisions about your money.
Most people have never been taught much about inance and often we
“This is the mis-
sion of the Motley
Fool – to educate,
amuse and enrich.”
Page 3
The Motley Fool’s Ten Steps
just muddle through as best we can. But tending to your inances isn’t
as mysterious or complex as you’ve probably imagined – and we’re going
to make it even easier for you.
For a start, we think the person who really has your best interests at
heart is you. We also think that you don’t need any fancy credentials to
sort out your inances. All that’s required is some common sense: and
you’ve obviously got bundles of that, since you’ve read this far already.
Anyway, without further ado, let’s part the curtains and unveil the
Foolish approach to saving and investing for your future.
Creak, creak, creak.
(The sound of curtains being drawn open)
(Oooohs and ahhs from the audience)
(Someone in Row 17 coughs)
The Motley Fool’s Ten Steps
Page 4
Step One - The Miracle of
Compound Returns
Sorting out your inances is good for you. Understanding how to save
for the future helps you to get rich so, in time, if you get a sudden urge
to buy that lovely shiny new Ferrari you saw for sale down the road, you
can do so. (OK – so it’s probably more likely to be a Ford Mondeo than
a Ferrari, but the sentiment’s the same.)
One of the irst steps towards sorting things out is to make sure you
take advantage of the Miracle of Compound Returns. Put simply, this
means that, if you’re saving, the returns should be as high as possible for
as long as possible. Here’s why:
Over long periods of time a difference of only one or two percentage
points can have a huge impact. You don’t have to do any maths to under-
stand compounding – it simply means that your money makes more
money over long periods of time, particularly if you’re getting the highest
interest rates possible. So, you start off just getting interest, but then you
earn interest on that interest and then you earn interest on the interest
on the interest, and so on. You get the picture. Over long time scales, it
really adds up. Let’s have a look at how this works.
Assume a number of Foolish women at the age of 20. All appreciate
the importance of long-term regular investment but disagree about the
best method. For the sake of argument we’ll assume that they have each
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The Motley Fool’s Ten Steps
chosen methods that return different annual growth rates and they
each contribute £100 per month until they’re 60. Let’s look at the num-
bers:
1
Fenella
Felicity
Freda
Faith
Florence
5%
8%
12%
15%
20%
Age 20
0
0
0
0
0
Age 30
£15,499
£18,128 £22,404 £26,302
£34,431
Age 40
£40,746
£57,266
£91,986 £132,707 £247,619
Age 50
£81,870 £141,761 £308,097 £563,177 £1,567,625
Age 60
£148,856 £324,180 £979,307 £2,304,667 £9,740,753
As you can see, even small differences in the rate of return have a
huge impact on the inal pot.
Now let’s introduce you to Fay, a Foolish young woman who, on her
20
th
birthday, sensibly decides to invest £100 a month into an index-
tracker ISA (more on these later). For the purposes of our example, let’s
say it appreciates at a rate of 12% a year – a not unreasonable estimate,
although bear in mind that we haven’t taken inlation into account. At
the age of 30 she marries Ferdinand, stops work to have children and
cancels the direct debit into her ISA.
Ferdinand, meanwhile, who has frittered away his money and his
twenties on pastimes too terrible to mention here, decides on his 30
th
birthday to start contributing the same £100 a month into the same
scheme and continues until he is 60. The numbers pan out like this:
1
2
3
4
6
5
Fay
Ferdinand
7
£100pm Age 20-30
£100pm Age 30-60
Age 20
0
0
8
Age 30
£22,404
0
Age 40
£69,582
£22,404
9
Age 50
£216,112
£91,986
Age 60
£671,210
£308,097
10
Ouch! Extraordinary, isn’t it? Fay only contributed for 10 years and
yet she’s got more than twice as much as her husband. So it’s not just
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