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Reframe Newsletter: Pillar: Economic Well-Being - Smart Investing

Delving into Compound Interest and the Advantage of Tax-Efficiency
Estimated Reading Time: 4 min and 3 sec

Hello Reframers!

This week, we turn to another pillar of a fulfilled life: Economic Well-Being. Wealth isn't just numbers—it’s about using your assets to ensure freedom, opportunity, peace of mind, and ultimately, share prosperity with others!

First, let’s dig into why this matters regarding living a life of significance.

The Greater Good of Financial Freedom
Attaining economic well-being isn't just about driving a nice car, living in a nice house, or ensuring your child goes to the nicest private school in town; it ripples outwards and can (and should) benefit others.

Financial freedom allows you to:

1. Support Loved Ones: Ensure your family and friends have access to education, healthcare, and opportunities.

2. Empower Communities: Invest in local businesses, sponsor scholarships, or fund community projects.

3. Enable Generosity: Contribute to causes you’re passionate about, be it charities, research, or the arts.

4. Leave a Legacy: Shape the future by setting up foundations, trusts, or endowments that continue to do good long after your life is over.

Do you get the bigger picture here?

We could talk about a million things on money, but let’s start with one game-changing concept that can reframe how we think about long-term wealth generation.

🌟 The Eighth Wonder of the World: Compound Interest
Compound interest, often termed the "eighth wonder of the world" by Albert Einstein (allegedly), represents the simple yet exponential concept where interest is not only calculated on the principal amount of invested dollars but also accumulated interest from preceding periods.

By starting investments early and allowing returns to compound, one can witness the magic of money growing exponentially over time 📈, aka the Snowball Effect.

Try this compound interest calculator to see what your investments could be worth someday!

Compound Interest Visualized: Warren Buffett’s net worth over time, shown below, is a great example of compound interest. Most of his wealth was amassed in the last few decades of his life, showing the incredible (and exponential) power of compound interest. Simply incredible. There is a formula for this that we learned in high school….

Your Money, Amplified
Think of it like this: you plant a seed 🌱, which grows into a tree🌳 producing more seeds. Those seeds, too, sprout, leading to a forest. This mirrors the essence of compound interest—a small investment can yield significant returns when nurtured over time.

Tax-Advantaged Accounts: A Game Changer
Tax plays a pivotal role in investment growth. With tax-advantaged accounts, you benefit from seeing your investments grow free from immediate taxation or tax-free with up-front taxation.

I highly recommend spending some time on Investopedia if you’d like to learn more about these types of accounts.

Fair warning: rabbit hole 🐇🕳️

A quick “starter pack” as you venture into the world of tax-advantaged accounts…(There are more)

• Retirement Accounts: Tools like 401(k)s or IRAs can shield your investments from taxes until you withdraw them in retirement, allowing them to compound more effectively. Conversely, ROTH IRAs grow tax-free, but you are taxed “up-front” at your current tax bracket and are not taxed when you withdraw.

• Health Savings Accounts (HSAs): Aside from medical expenses, these can also be leveraged for retirement, providing a triple tax advantage.

• 529 Plans: Designed for education savings, the growth and withdrawals for qualified expenses are tax-free.

By utilizing these accounts, you not only save money but also supercharge the growth of your investments.

Strategies for Growth: The Reframe Way

1. Start Early: Begin investing sooner rather than later. Father time 👴🏿 is the greatest ally of compound interest.

2. Consistent Contributions: Regularly feed 😋 your investments. This ensures that compounding works on every penny you contribute.

3. Reinvest: Maximizing compound interest involves reinvesting earned interest. It's not about the immediate earnings but their long-term growth potential. 🌲

4. Stay Informed & Diversify: Knowledge is power👩🏽‍🔬. Understand market trends, spread out your investments over time and across various asset types and markets, and avoid placing all hopes in a single venture, aka stay diversified and dollar cost average. (Look these up)

The best quote (in my opinion, of course) on compound interest is by one of my favorite thought leaders and investors, Naval Ravikant. This photo was borrowed from “The Almanack of Naval Ravikant” by Eric Jorgenson. (This is another book on my list of “game changer” books, you should buy and read it).

Tips from the Ramsey Man

Pro Tip: Dave Ramsey recommends investing 15% of your household income into Roth IRAs and tax-advantaged retirement accounts, such as a 401(k). This is after you've saved an emergency fund 🚑 of three to six months of expenses and paid off all non-mortgage debt (high-interest credit cards, personal loans, etc.) using his "Baby Steps" approach (see below).

The True Wealth Paradigm
Achieving economic well-being isn’t just about accumulating things but channeling resources and assets to amplify our life’s quality and impact on others. Real wealth offers freedom—to chase passions, help others, and create real, lasting impact.

With the wise words of Warren Buffet in mind, "Do not save what is left after spending, but spend what is left after saving," let’s navigate towards a future that’s not only financially stable but brimming with experiences and cherished connections.

I hope this planted a seed in your mind… here's to smart investing and a life of meaningful wealth, significance, and fulfillment.

Salud!

🌱🌳 Chief Reframer 🌱🌳

The Content is for informational purposes only. You should not construe such information or other material as legal, tax, investment, financial, or other advice. Nothing in this newsletter constitutes a solicitation, recommendation, endorsement, or offer.