Long-Term Dreaming

Too often, we focus on the short term at the expense of the long term. Think of your vacations. You probably reminisce now and then about some past ones. And you probably have an idea of what you'd like to do on your next vacation. But have you spent much time thinking about what kind of vacation you'd like to have in five years? Have you tried dreaming about a bigger vacation, one more special than usual?

This happens in our financial lives, too. We move our money from one six-month CD into a one-year CD, looking at short-term interest rates. We review our credit card statements and think about how our several-thousand-dollar debt will be reduced by the $200 we're sending in today. We see that a mutual fund or a stock gained 26% last year, so we snap up shares, not asking ourselves how likely it will be to repeat that.

That's rather suboptimal. Sure, your short-term money should be in safer places, like CDs. But step back and think about whether rates are likely to go up or down, and choose the terms of your CDs accordingly. Start visualizing your credit card debt at zero -- and try to get there as soon as possible. See if you can chip in $500 or $1,000 per month, not $200. If you're paying 20% interest on your debt (and gobs of people are paying much more), that's a painful form of reverse investing. You can't expect to earn 20% on your stock investments -- yet you're paying that out. Look at the 20-year average growth rates for some big-name companies:

Data from Yahoo! Finance.

Now start imagining what the growth rates above can do for you over the long haul. If you have $100,000 in your nest egg and it grows by an annual average of just 8% over 25 years, it would amount to almost $700,000. That's enough to support an annual withdrawal in retirement of more than $27,000 (which will rise with inflation). Imagine the kinds of vacations you can have with that, along with being able to sleep soundly at night.