The Power of Compounding

When considering a subject to write about, I decided to ask one of my old college roommates what financial topic she wishes she’d known more about as a younger professional. Her response: Why should I make consistent, small contributions to a 401k – or other retirement account? And how does it build up over time?

What my friend was referring to is called the power of compounding. You may be more familiar with compound interest in terms of debt – if you don’t pay off your balance within a pre-determined term, most debtors start charging interest on the unpaid balance, and your total amount owed increases with time – yikes!

When it comes to savings, the power of compounding looks instead like positive growth – which means the amount of money in your account increases resulting from re-investing dividends and interest over time. It’s tempting, especially for young adults or lower-salaried professionals, to wait to invest until you feel like you have “more money,” but is that wise?

Let’s take a look at how small investments over time compare to waiting for more “cushion” in income.

Meet three fictional characters – Mary, Max and Carter. At age 25, they have just started their first “adult” jobs in Des Moines and are each renting an apartment while paying off student loans. All three young professionals have access to an employer-sponsored retirement plan at work that they can contribute to (and may have an employer match.)

Mary decided to save in her employer-sponsored retirement account and figures she can afford to put $5,000 into this account every year. Her investment averages a return of 7% per year, and she continues to save $5,000 each year for 10 years. Mary then decides to change jobs, and her new employer does not offer a company sponsored retirement plan. Now that her investments aren’t automatically scheduled through work, she forgets to set up a savings plan and leaves the $50,000 invested in that original account. When she retires at age 65, she checks her account and is surprised to see it has grown to $562,683!

As a recent graduate, Max decided to focus on paying off those pesky student loans first and hold off on retirement savings for ten years because he just didn’t have the cashflow. After celebrating his loan payoff, Max decides to invest $5,000 per year into a retirement plan. He sets it up and forgets about it. He doesn’t miss the money since he had been paying off his student loans until then, and he never makes changes to his contributions over the years. He also has an investment that averages 7% a year. When Max is set to retire at 65, he checks his account statement to see that his account is worth $505,365.

Carter, on the other hand, decides to start saving $5,000 a year right away like Mary, but he never quit. When Carter retires at age 65, he is excited to see that his investments had grown to $1,068, 048. Carter had only invested 10 more years than Max for a total of $50,000 more, but because of the power of compounding, Carter’s account was worth twice of Max’s.

total amount invested account value at 65
mary (saved for 10 years and stopped) $50,000 $562,683
max (waited 10 years, then saved for 30 years) $150,000 $505,365
carter (saved for 40 years) $200,000 $1,068,048

Even if you can’t afford to save much now, having more time for your investment of any amount to compound will be more beneficial than holding off to save. Even though Max saved three times more than Mary, his account was still worth $57,000 less than her account was at age 65 because he waited to start saving.

The moral of this fictional story? Save early and save often. Establishing a healthy habit of saving into a compounding account early is beneficial in several ways — not only can you reach your long-term financial goals, but even if (when?) life throws you a curve ball and you need to pause your savings plan, your saved investment continues to work for you.

Lindsey Taylor, MFM
Financial Advisor

Securities and Advisory Services offered through Harbour Investments, Inc. Member SIPC & FINRA.

Virtual Meeting Options with Triangle Financial

The outbreak and response to Coronavirus Disease 2019 (COVID-19) is new for all of us.  We are staying tuned in as the situation evolves.

  1. Triangle is prepared. We have all our staff set up to work remotely and will be able to provide you with service provided the health of our staff is well.
  2. You have an option to meet virtually. If you already have appointment or are scheduling, you have an option to meet virtually via a Zoom meeting OR via phone call.  Please let us know if you would like this option and we will prepare accordingly.
  3. This is temporary and we are confident we will move through this.

There is no known immunity to the virus, therefore the actions we take can impact the vulnerable populations and reduce potential spread of the virus.  We want to offer you options to if you so choose.

Please look for emails, follow us on Facebook and check our website to stay posted on what we are doing.  Wishing you wellness!  We are here for you.

**Please remember that we have new email addresses using our [firstname] @ TriangleFSinc.com **

Your partners in Wealth,

Kendra, Lindsey, Jessica & Aurora

Securities and Advisory Services offered through Harbour Investments, inc

Client Stories on Wealth

Clear service structure: value

“Life is Change, Growth is Optional

One of my favorite professional coaches, Janet Tingwald, uses this as her email signature and tagline. While much has changed in the financial industry during the 30 years, we have been serving Triangle clients, one thing remains the same – our focus on growth. Not only do we strive to expand our clients’ portfolios, but we believe the continual growth of our firm brings more opportunities, more options to choose and learn from, and more overall stability. Growth stretches us to extend beyond our comfort zones and learn along the way, and it allows us to practice grace as we discover new paths.

In this vein, we are excited to announce that we are growing our staff and services. Through new team members and service choices, we are committed to continue providing compassionate and comprehensive financial services to our clients through every season of life.

New Staff

As always, we work internally as a team, leveraging each of our strengths and expertise to provide the most complete services for our clients. We have added a couple new faces to our team over the last year, and with them brings added skills and experience. To ensure efficiency, we have shifted some responsibilities to serve the growing needs of clients.

Miaja is now a paraplanner, which means she’s available to assist the team with financial plan development and wealth management administration. She is working on her finance degree and is excited to continue helping Kendra prepare for client meetings while providing the excellent service our clients have come to expect.

Aurora is our newest team member, joining the Triangle team in August as a part-time receptionist. We welcome her experience with annuities and look forward to clients meeting her as they walk through our doors!

Lindsey is transitioning into a full-time advisor, partnering with Kendra to service some clients and becoming the lead contact with others. With Kendra always available for additional support and oversight, we are excited for Lindsey to share the knowledge and expertise she’s gained after 10 years with the firm. Lindsey is taking new clients and expanding her unique and successful approach to small business retirement plans.

Jessica often works out of her home office, providing her proficient financial advising to the Grinnell area. She continues to cultivate her extensive institutional expertise while providing valuable insight to foundations and endowments.

Kendra continues to flourish as our fearless leader and enjoys visiting with every one of our clients. She has developed a niche service helping divorcing couples navigate financial changes and is now a Certified Divorce Financial Analyst (CDFA). No matter the amount of growth we experience, Kendra keeps our team focused on providing the quality, compassionate expertise that makes us unique.

Clear service structure: value

Providing value continues to be our priority, and to us, value means exceeding expectations at a fair cost. As each of our clients is unique, so should be their wealth plan. And we know that for you to understand our value proposition requires clarity of service and transparency of fees.

We don’t believe in surprises. Because of that, we are moving to a fee-based service structure, allowing more transparency than commissioned funds provide. The fee-based option reduces perceived conflict of interest situations by compensating Triangle advisors based on services provided rather than by transaction. We believe that knowing what you are paying for, and understanding what services you can expect, is fundamental to making sound financial decisions. So we’re practicing what we preach.

We are here to help you. We want to remain your trusted resource and guide in all of life’s financial matters. When you contact us with any concerns, questions or opportunities, we will let you know upfront what to expect.

What does all this mean for you?

More expertise. New faces. And even more customization.

Triangle works as a team to create strategies that build and preserve wealth for our clients. We will continue to meet daily to collaborate on cases and lean on one another for our individual and unique knowledge and perspectives, providing you with the most comprehensive services.

We appreciate your patience as we grow our team and improve our systems to work more effectively for you. You can expect to see some new reports as we upgrade software to support our growing team and to continue delivering the highest quality financial advising and wealth management.

We are committed to speaking to each of our clients individually about these changes in order to explore and customize the best option(s) for you. There is no one size fits all, so you can count on us optimizing a plan that fits best for your goals.

We are excited to modernize our services and continue to grow our Triangle family while providing the compassionate expertise you’ve come to know and trust.

During the development of our new models, we recognized that our clients have different needs, and have developed additional services to help optimize the services you receive without significantly increasing the fees you pay. We’ve also worked to develop a custom RoboAdvisor service designed to allow for a hands-off investing experience with the security of knowing that your trusted advisors at Triangle are monitoring your investments & available when you do have an advising need. This program is great for younger investors who may not need or want to meet with a financial advisor regularly, but know that in the future we are there for questions

The Financial Planning Industry is Changing

“Life is Change, Growth is Optional”

I heard that book title the other day, and even though I haven’t read the book, I found myself considering the title in relation to my profession. As in the case of life itself, there exists a lot of change in the financial world. Our job as financial advisor is to stay informed and help clients navigate their options. However, despite consistent advances in technology and an ever-changing landscape of regulations, we make sure three things remain constant for our clients — our relationship, our collaboration toward growing wealth, and always being a good steward of their money.

A New Fiduciary Standard

A few years ago, there was a Department of Labor (DOL) Fiduciary Ruling in the news that reshaped our industry significantly, proposing that financial advisors act as fiduciaries. Ultimately the DOL Ruling was struck down by the courts, but we adopted many of the recommended standards in our office before the rule was vacated. Because we have always operated in a fiduciary way, the changes we adopted were minor. We started a stronger campaign to align our fees and services for all our clients, and added a few new internal processes.

This past June, the Securities and Exchange Commission (SEC)came out with Regulation Best Interest, which has many of the same concepts. Both rules expressed the same idea – advisors need to put the client’s best interest ahead of any advisor interests. The newer SEC Regulation BI will be fully implemented in the next year.

What is a Fiduciary?

A fiduciary, according to the definition in the Investment Advisors Act of 1940, stipulates a duty of loyalty and care, including putting a client’s interest above the advisor’s interest. Inherently, this can lead to possible conflicts of interest. At Triangle Financial Services, we have always operated with the client’s best interest in mind. With the new legislation, we now have better guidance on how to define the client-advisor relationship and possible conflicts of interest.

The shift to fee-based

Our industry has slowly been moving away from the commission-based model to a fee-based model, and we’ve been slowly changing too. The new paradigm of fee-based may mean you pay an hourly fee for financial advice, or we apply an annual percentage fee to the assets we manage for you. One of the biggest changes you’ll see in the new fee-based model is that you will see exactly how much you are paying for. In the old commission model, the fees were internal to the investments, and it was more difficult to specifically figure out how much you were paying.

With the shift to fee-based, we are able to better define service levels and deliver the appropriate services with a fair fee for services. If you have met with us in the last year, we likely have discussed our new service model and helped recommend a service level to best meet your needs. If you haven’t met with us, watch your mailbox and inbox for more information about our service changes & make sure to schedule an appointment with us next time we reach out for your regular review.

We are excited to modernize our services and continue to grow our Triangle family while providing the compassionate expertise you know and trust.

During the development of our new models, we recognized that our clients have different needs, and have developed additional services to help optimize the services you receive without significantly increasing the fees you pay. We’ve also worked to develop a custom RoboAdvisor service designed to allow for a hands-off investing experience with the security of knowing that your trusted advisors at Triangle are monitoring your investments & available when you do have an advising need. This program is great for younger investors who may not need or want to meet with a financial advisor regularly, but know that in the future we are there for questions.

For most clients, we are recommending consolidating accounts into a fee-based model, with a sliding fee scale based on assets Triangle helps manage. The two biggest changes with this model are applying an annual fee to the account to pay for services, and a clear understanding of the services you are paying for/receiving.

Sometimes, you may need financial advice not included in your service model; or maybe you want to manage your own investments somewhere else and just need a financial plan. For these needs, we have an hourly fee for service where you can pick and choose which services you need. If Triangle manages some of your assets, we offer a discount on these additional services.

Financial literacy – knowledge is power

Unfortunately, financial literacy rates have dropped nationally since the Great Recession of the late 2000s. According to the Financial Industry Regulatory Authority (FINRA) Capability Study (usfinancialcapability.org), which shares financial literacy ratings by state, Iowa scores near the national average for spending and savings habits. For example, only 46 percent of Iowans reported having a “rainy day fund” in 2018 compared to the 49 percent national average. A rainy day fund includes a savings of at least three months’ worth of money to cover expenses in case of an emergency.

Investopedia defines financial literacy as “the education and understanding of various financial areas, including topics related to managing personal finance, money and investing.” This includes managing personal financial affairs and making appropriate decisions about investments, insurance, real estate, college tuition, budgeting, retirement and tax planning.

Why is financial literacy important? Financial health is a catalyst for stability, security and peace of mind. And when you feel safe and secure, your mental focus is better able to shift from surviving to thriving.

In a broader sense, financial literacy is important to the health and stability of our communities, economy and country. The more households with improved financial literacy, the better we are able to care for ourselves and those around us.

Keys to increasing financial literacy:

  • Know your numbers. Starting with your income and expenses, you need to know how much you earn and your monthly expenses so you can wisely determine how much you can save each time you earn.
  • Make savings/wealth building a necessary fixed expense. It’s simple – spend less than you earn. Automatically designate an amount to save from each paycheck before you spend any of it.
  • Start (and retain) a “rainy day” fund. This fund is separate from savings. Your rainy day fund would ideally include approximately 6-12 months of savings to cover monthly expenses if you are unable to work. Saving for a rainy day, plus a regular savings habit, will provide you with some resiliency and ease of mind.
  • Know your limitations. Ask for financial literacy help when you need it. As with learning to read, becoming proficient in financial knowledge can take time. Learn as you go and ask for professional support when you are not sure. That’s what we’re here for!
  • Practice makes perfect – or at least better! Habits don’t get established in a day. Start practicing healthy money habits and be intentional in continuing to grow them every day.

In September, dozens of local organizations will meet for the second time at the Collaboration for Economic Inclusion and Financial Capability Forum. These groups are exploring ways to increase financial literacy in Iowa, and the Triangle Financial team is proud to be participating.

If you’re curious about your own financial literacy, check out our Facebook page or website for a financial literacy test. As always, cheers to your financial health and wealth from the Triangle Financial team!

Kendra Erkamaa, CEO & Financial Advisor

Triangle Financial Services, Inc.

www.trianglefsinc.com

Securities and Advisory Services offered through Harbour Investments, Inc.

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