Investable assets are a worthwhile consideration for calculating your level of wealth. Net worth is probably more common, but often, some individuals will include things such as their home or automobiles in a net worth calculation.
Investable assets, however, is strictly limited to things like cash, funds in bank or savings accounts, retirement accounts, stocks, bonds, CDs, insurance contracts with cash value, etc. Don’t include things like precious jewels or things not easily converted to cash. You might consider investable assets to be everything you can easily convert to cash without selling your residence or belongings.
Why is monitoring your amount of investable assets important?
Your investable assets are essentially the assets you own that are working for you, or generating a return. This is the key to generating significant levels of wealth.
If you’re early in your career or adulthood, your main financial goal needs to be to get as much money as possible working for you as quickly as possible.
For many young investors, the early years can be discouraging. Let’s face it, your income isn’t typically very high during these years, and socking away a couple hundred bucks every now and then can result in you feeling like the entire exercise is pointless. Young investors have to work hard to save small amounts of money, and the resulting balances don’t increase very quickly.
But over time, as incomes rise and as prudent investors sock more and more money away, the balances do, in fact, begin to grow quickly.
The key level of investable assets
To me, the key level is $500,000 of investable assets. For most, at this level, the annual returns on this sum of money should outpace the annual contributions.
In the beginning, nearly all the growth in your wealth is due to contributions. In other words, nothing more than saving money.
In the end, nearly all the growth is due to returns. At some point, you crossover into returns equaling and then outpacing contributions, and the $500,000 level is a conservative estimate for many investors.
Of course, wise investors don’t stop contributing to their investable assets once they hit this milestone. But, with contributions and increasing returns, the balance of your assets begins to grow quickly. Accumulating wealth starts to kick in to a higher gear.
Let’s look at some examples to illustrate the point.
Example 1: $18,500 annual contributions, 4% annual returns
It makes sense to test this with some pretty conservative figures. Let’s start with a 4% rate of return.
As shown in the below charts, returns begin to overtake contributions between year 18 and 19 based on the $18,500 annual contribution and 4% annual return levels.
The following chart shows the balance growth, and which component is contributing to the balance (contributions and returns). As you can see, again, in the 18-19 year mark, the $500,000 threshold is crossed and returns begin to increase much more rapidly.
Example 2: $18,500 annual contributions, 6% annual returns
By tinkering with the numbers, you can see how the results change. It can get pretty fun, especially as you plug in different levels of return. Let’s keep the contribution level the same while changing the annual returns to 6%. You can see that the numbers grow much more quickly.
Moreover, you can see the crossover point where annual returns eclipse annual contributions happens much earlier in the 12 to 13 year range.
By looking at the overall balance growth, you can see that the crossover point mentioned above occurs much earlier than the $500,000 balance level. This is due to the higher return level.
Example 3: $24,000 annual contributions, 8.8% annual returns
One more example just for kicks…
In this example, we’re going to use Vangaurd’s 60% stocks / 40% bonds allocation history. Here, this allocation has averaged 8.8% going back many decades. So, let’s plug in 8.8% for annual returns.
Let’s also tweak the contribution level. Let’s assume an individual is maxing out his or her 401(k) with the maximum contribution of $18,500 as well as plowing away $5,500 each year in an IRA. The total amount saved in a given year is $24,000.
Here you can see the crossover point between annual contributions and annual returns is around the 9 year mark.
In looking at this next chart, it’s immediately obvious how fast the assets grow toward the end of the curve with the higher rate of return compared to previous examples. With enough time and decent rate of return, money will start to grow very, very quickly as shown here.
Let’s get back to the $500,000 “key level”
As the above examples show, the $500,000 level becomes less relevant to the crossover point when the rate of return gets higher. Still, I think it makes sense to push hard for the $500,000 level with regards to investable assets, because we should plan for more conservative rates of return.
Another reason I like the $500,000 level has to do with the common debate over whether one should pay down his or her mortgage versus keep investing. The advice over this topic can vary. Dave Ramsey, for instance, will advocate paying down the mortgage with all extra money as long as you’re contributing 15% of your income towards retirement. Definitely a reasonable approach.
Others will advocate putting all money towards investing since the mortgage is cheap money. If your mortgage is 4.5% and you’re getting 8.8% on a conservative Vanguard fund, why pay off the mortgage? Also a reasonable argument.
I use the $500,000 level of investable assets as another factor to consider on the discussion of paying off your mortgage vs. investing additional funds. I prefer the idea of putting all money towards investable assets until the key level of $500,000 is reached. After the $500,000 level of investable assets is reached, then throwing some extra money at the mortgage to pay that down makes sense (as long as tax advantaged options such as 401(k) contributions and IRA contributions are still being maxed).
How long will it take to reach $500,000 in investable assets?
As we showed in our previous examples, the length of time will vary based on how much money you’re socking away and what returns you’re getting. The below table shows a number of scenarios to help you see how long it will take to reach this key level.
Note: The following table is calculated using annual contributions and annual compounding.
|Annual Contribution||Annual Return||Years to $500,000+ Balance|
A few notes above the table above:
- Saving only $5,000 per year is a long slog toward any significant wealth accumulation. Even with higher levels of return, you’re looking at multiple decades to reach significant levels such as $500,000 and up.
- With higher contribution levels, rate of return doesn’t move the needle as much on the march to the $500,000 level. However, rate of return moves the needle tremendously long-term (as shown in the previous examples and charts).
Investable Assets Key Takeaways
Going hard towards the $500,000 level in investable assets as early as possible in your life will dramatically alter your financial life
By getting to this key level early in your life, it will move your long-term financial trajectory in a very significant way. Obviously, saving money at an early age is difficult. Most people in their 20’s aren’t earning significant money, and socking away $5,000 can feel like an uphill battle. Watching the balances grow quite slowly year after year of $5,000 contributions doesn’t exactly help light the fire either.
Still, finding aggressive ways to sock away additional money, especially early on, can lead to tremendous benefits. Working an extra job, finding secondary income, finding ultra-low cost living situations while working as a young, single adult are ways young people can getting early contributions up.
According to the above table, going from the $5,000 annual contribution level to $15,000 can reduce the time to $500,000 by anywhere from 7 to 13 years (based on the range of returns shown).
If you can simply max out your 401(k) each year, the rest is pretty simple
While achieving the kind of financial security discussed here definitely takes work, it’s not rocket science. If you want the uber simple approach, just max out your 401(k) every year at a minimum and go with a conservative Vanguard fund that mixes stocks and bonds. Keep at it every year, and you’ll have millions in a few decades.
The growth towards the end of your working years will be quite dramatic based on simple compounding. The earlier you can start, the more high powered years you’ll have on your curve. The above charts show 35 years of investing. Change the time span to 40 years, and those extra 5 years generate incredible returns.
So, run hard after that $500,000 investable assets level. Then, just stay the course and keep it simple,