I was shocked to find out that some young people have lots of debt on their backs. Having a mortgage is understandable, but some even have an auto loan, a line of credit, and credit card bills that aren’t paid off.
I think credit card bills should be paid in full every month because their interest rates are very high. My credit cards charge sky-high interest rates of about 20%.
It’s not easy to get consistent 20% returns on the market. So, it makes sense to pay off credit card bills every month before using any remainder of the paycheque for other lower-interest loans or for investment.
I think it’s a pretty good idea to live as if you are retired. I mean that in the financial sense, in which you spend below your means. You’ll probably feel good to save some money at the end of every month.
Saving 10% of your paycheque every month can do wonders
The median income for an individual in Canada was $32,790 in 2014. Assuming a 4% rate of growth, that implies a median income of $36,884 this year.
If you’re able to save some of that and invest it for a good return, you can build some serious wealth for your retirement.
For example, if you save 10% of that income ($3,688) for a 10% rate of return for 33 years, your portfolio would snowball to more than $1 million (and $2.1 million if you invest eight years longer)!
What should you invest in for a 10% rate of return?
You can get a 10% rate of return from dividend-growth stocks such as Bank of Nova Scotia (TSX:BNS)(NYSE:BNS), which trades at a fair value today. The quality bank offers a yield of 4% and has the potential to grow its dividend by about 6% per year in the near future, which would approximate a rate of return of 10%.
Dividend stocks aren’t just for retirees. They’re also for anyone who wants to improve the stability of their portfolio’s returns. That said, dividend stocks tend to be mature companies.
Risk-averse investors can consider well-managed growth companies that can boost the returns. In fact, it’s not unheard of to get rates of returns that greatly exceed the 10% target.
In the last 12 months, Spin Master Corp. (TSX:TOY), Sierra Wireless, Inc. (TSX:SW)(NASDAQ:SWIR), and Shopify Inc. (TSX:SHOP)(NYSE:SHOP) have appreciated 51%, 62%, and 276%, respectively, which is amazing. They’re good considerations for long-term growth on any meaningful dips, especially from a market-wide decline.
If you live like you’re in retirement before you retire and spend below your means every month, you will have a comfortable retirement. In the meantime, you can invest your savings for meaningful returns via quality dividend-growth stocks, such as Bank of Nova Scotia, and perhaps sprinkle some high-growth stocks in your portfolio to boost long-term returns.
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Fool contributor Kay Ng owns shares of Spin Master. David Gardner owns shares of Sierra Wireless. Tom Gardner owns shares of Shopify. The Motley Fool owns shares of Shopify, SHOPIFY INC, and Sierra Wireless. Shopify is a recommendation of Stock Advisor Canada.