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Better Together

The Stone Age ended because of two soft metals. Both were softer than the hardest stone. But together, the two metals produced something that was tougher than any rock. Thus, the Bronze Age was born.

Some things are better together.

No one knows how bronze was discovered. Some believe ancient civilizations gathered copper and tin rocks to build rings that encircled their fires. When the fires got hot enough, the metal rocks melted together forming bronze, or so the theory goes. Then, by luck, it was discovered these fire-ring “rocks” were incredibly hard, making them perfect for weapons and tools.

Two metals – copper and tin – both soft according to any scientific metric. When combined, however, they form a substance that is harder than either one is alone.

It seems to me that financial planning and investing create something similar. Together, they produce a result far superior than either could ever deliver alone.

I can think of dozens of examples that prove this point. But the most basic example is probably the best.

The vast majority of millionaires in this country attained their wealth a similar way. They didn’t start a globe-spanning business. They didn’t win the lottery. They didn’t inherit their wealth. Instead, they worked at a job that paid them a reasonable wage. They figured out how to save a good portion of their wages, and they deployed those saved wages in opportunities that increased in value over time.

Figuring out how to save is a fundamental step in the financial planning process. Identifying opportunities that increase in value is a fundamental step in the investing process.

For an individual earning a reasonable wage – however you define it – to become a millionaire through savings alone is difficult. If each saved dollar is left under the mattress, it takes a lot of savings to reach $1 million.

For example, someone making $50,000 a year would have to save 50% of every dollar they make for 40 years to reach $1 million dollars, if they didn’t earn a return on any of their savings.

On the other hand, an individual who is a tremendous investor, but has nothing to invest, will also struggle to ever build up $1 million.

For example, someone making $50,000 a year but only saving $1,000 a year would need an average return of 13% for 40 years to reach $1 million. With stocks returning 9% to 10% a year over long periods of time, this individual would indeed be a tremendous investor.

But look what happens when financial planning and investing are combined.

Someone making $50,000 a year and saving 15% a year into investments that generate a return of 6.5% a year for 40 years, would end up with $1.3 million.

Think about that. They didn’t save 50% of their wages – in fact they saved at far less than half that rate. They didn’t earn a 13% rate of return – in fact they generated precisely half that rate. And yet, they ended up with $300,000 more than $1 million.

That’s the powerful combination of financial planning and investing.

Attaining wealth can happen in a number of ways. But the most common path involves a good saver, who earns a good return on their investments, and does each of those consistently over time.

It’s not sexy. In fact, it’s downright boring. But it works.

The philosopher Aristotle said the whole can be greater than the sum of its parts. That wisdom is true for bronze, and it’s true for attaining wealth.

Some things are better together.

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