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From $8 an hour to $80K per year

By Neil O'Connor

For many new firefighters, they must manage a significant increase in household income for the first time.

A financial advisor may be able to help you with a plan to reduce high interest debt and accumulate wealth for your future, but something to always consider is compounding.

Compounding is the financial equivalent of a snowball rolling downhill. Compounding, if planned correctly, can generate earnings on top of earnings.

Consider over the last 20 year period ending Dec. 31, 2011 a $10,000 investment in the stock market (S&P 500) would have compounded to $45,012. That same $10,000 investment in the stock market over the last 50 year period ending Dec. 31, 2011 would have grown to $843,411. This is certainly not a suggestion but the S&P 500 index fund is simply a good example of the power of long-term compounding.

Compounded earnings may potentially dwarf the initial investment over time. Compounding may of course work against you with debt, high-interest credit cards, auto loans etc. as they can also snowball.

It is your choice what compounding path you will put your family on. Whatever the case, here are some suggestions that may help to simplify your financial life:

1. Start with a plan
A little time spent planning now can benefit you later. First, determine short-term financial goals. Do you want to purchase a home in five years? Are your kids heading off to college soon? Is buying a car a top priority next year? Next, think about long-term goals, such as saving for retirement and, if your children are young, college expenses. Estimate how much money you'll need to meet each of these goals.

2. Build a Better Budget
Next, look at your current monthly net income and then set up a budget. Creating a budget allows you to see exactly where all your money goes and to determine where you can scale back. After making cuts, invest that money to help pursue your financial goals.

3. Invest systematically and start now
You can take the time and guesswork out of investing with a systematic investing program. You can make arrangements to automatically invest a specific amount of money on a regular (e.g., monthly) basis, a strategy also known as dollar cost averaging.* In addition to making investing easier, dollar cost averaging could potentially save you money. You'll buy more when prices are low and less when they're high. Over time, the average cost you pay may be less than the average price of the investment.

4. Rely on an investment professional
While the financial world is far more complex than it was just a few years ago, you don't have to go it alone. Think about tapping into your investment professional's expertise before making any major change in your investments.

*Dollar cost averaging involves regular, periodic investments in securities regardless of price levels. You should consider your financial ability to continue purchasing shares through periods of high and low prices. This plan does not assure a profit and does not protect against loss in declining markets.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

About the author

Neil O'Connor has 19 years of experience in the investment industry in both the retail and institutional markets. He is an independent advisor with LPL Financial. 



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