While the end of the year seems to be the best time to help your favorite charity with some of the money you received, don’t forget to give to your future self also.  Many of us are of the mindset that we have plenty of time for “that,” but the “Rule of 72” tells us otherwise.

What is the rule of 72?

The rule of 72 is a formula that “predicts” the estimated amount of time it takes for an investment (your Christmas money) to double considering an average expected rate of return.

Applying this rule, take 72 and divide it by the rate of return on an investment. This will give you the number of years you’ll need to make double your money. The S&P 500 index has an average historical rate of return over 10% dating back to the 1920s through 2019. A lot has happened both good and bad during the past century, and a $1000 dollar investment made in the S&P in 1920 would be worth approximately $2,048,000 today. That’s a pretty nice “little” nest egg.

[NOTE: PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS]

Retirement versus Donations

Making charitable donations at the end of the year is a GREAT thing to do. The CARES Act has created incentives for you to help charities right away, including a charitable deduction of up to $300 in 2020, even if you don’t itemize. [1] This could save you $30-$111 on your 2020 tax bill depending on your tax bracket.

HOWEVER, while this is a great way to get back some of the money that you give, an investment in your retirement plan is a way to continue to give to yourself.

So, this holiday, consider taking the cash from Nana and investing it for the benefit of your future self.

[1] https://money.usnews.com/money/personal-finance/taxes/articles/new-rules-for-charitable-giving

 

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