You want to learn something very interesting?
The power of investing.
Not only investing large sums is powerful, I will show you that little amounts do count. If you don’t have a lot of money yet and can only set aside so little you are still way ahead of the crowd that spends paycheck to paycheck.
Lets see how much we can make out of this shall we?
Say we make around $1.600 a month and our bills are around $1.500, including some fun and savings money.
We have our $100 left over every month, we are young and want to do some investing. A very wise way to start investing is try to fail. Failing with $100 is fine, saving up 3 years worth of money and losing everything is like a personal stock market crash. So you don’t want to be ending up like poo that gets flushed down because of all the hectic on the market.
The market is mostly controlled by big investors, manipulators, stock market news, banks and most importantly emotions like greed & fear.
Always keep in mind that 80% of the stock market is controlled by people trading with greed & fear in their thoughts. You will also experience it. I had it and I sometimes still do, it’s just a fact about investing. You need to base a long term investment around principles. That’s why you need to research your investing a lot when trading in particular stock companies.
I would suggest if you are new and want to try it out a bit to go for index funds, ETFS and big blue chip stocks, these blue chips stocks are the gigantic companies like Google, Exxon, Amazon and Apple. These are mostly listed on the big stock exchanges like the DOW, S&P500 and foreign like the german DAX.
Most of these companies need money and time to get a significant return but you need to remember one thing. The guru from the stock market has explained it in 2 of he’s rules and these are DON’T LOSE MONEY.
Yes these are the words of the almighty Warren Buffet.
This guy is freaking great regarding amazing long term returns and being humble as a poor guy living in the Ghetto. Money and humbleness, what a great way to be rich.
We have our $100 in our pocket. So what are we going to do with that money?
Invest it once?
Invest it every month?
Lets check out the possibilities here.
Investing $100 once.
We get our $100 dollar bill and put it in an index fund that follows the S&P500 or another exchange so we get a safe return on our money.
The average rate of return on the S&P500 over the last 90 years is around 9,8% a year. Meaning that the $100 you invested 90 years ago is now worth $653.011,54 !
That’s a lot of money right there.
A shame you can’t enjoy that because your body is already rotting away in that casket under the ground after 90 years. At least you made your kids happy spending all that dough you put away for them.
But let’s be realistic here, putting away some money for your children is fine but you want to be enjoying some of your hard earned money yourself right?
The S&P500 returns like 9,8% every single year are also not very realistic. 7% would be a safer bet.
$100 invested at 7% a year profit would still be $53.469,48. But that’s a lot different then the $653.011,54 you would have got netting 9,8% a year. Now you see what compound interest can do for you, just 2.8% more, but over the long run it brings such a difference.
If you count in inflation 2 % a year, your money is now worth only $8.917,95. That is a very big difference from that $53.469,48 or the big number $653.011,54.
You can see that keeping inflation in your mind is a very important key in making your money grow over the long term.
What about investing $100 every single month?
Now we know that investing $100 only once and waiting for a return of 3000% over 90 years is not really something we want to be doing, we are going to invest that $100 every single month and see if it makes a big difference.
We take our $100 every month and we are going to put it into our 7% S&P500 index fund. We are going to invest for 40 years which is way more realistic than 90 years.
Not including inflation your balance will be $265.643,62 after 40 years.
For setting aside only $100 a month and investing our money in an index fund, it’s a very nice amount of money to have at your old ages. It won’t last forever because it just aint enough. But its nicer to have an extra $270.000 to your disposal. Most people don’t even have a couple of bucks in the bank. So take the $270.000 or nothing? I would take the money every day.
The average 60 year old has $172.000 in hes retirement account. This is the average! meaning some are above that, but a lot of people are below that! That’s just insane. You really think you can retire on only $172.000?
Adding that extra $270.000 would give you a lot of extra money in such a situation. Getting you $442.000 in your account. Once you want to take 4% a year from that account is a heck a lot more than only $172.000.
4% on $172.000 = $7.000 a year. A nice addition in income if you work, but not something you can live off.
4% on $442.000 = $18.000 a year. a whole lot better if you include a pension, but you ain’t living a luxury lifestyle on $18.000 a year. You will need to be almighty frugal in your old ages to comfortable live.
In my opinion you need more than half a million dollars in your account to comfortable retire in your old ages. We are not focussing on retiring because the irony is that you will be looking into the ages where you are going to die. Nobody wants a lot money just to die right? But we all grow older and when we can’t do our work or we don’t enjoy it anymore because of our age we need the ability to ‘retire’ .
Personally I believe you will need to have at least 1 million or more to really retire comfortable. especially if you take in account that over 40 years, everything is more expensive because of inflation.
You don’t want to focus too much on retiring but you sure need to keep in mind that you need ‘some’ income once the capabilities to work are finished or you want to retire early.
Investing $100 once is not a good idea, investing it every month is a way better method to create a nest egg over the long run. You should be doing some of it, even if you are on dire straits.
Investing 10 – 15% of your income.
If you don’t have a very high income and you are an average person making around $26.000/ year. Which comes out around $2.166/month.
After you focussed yourself on saving some money and got your savings rate at 15% from your $2.166 income you are setting aside $325 every month. Once you save this for the long term, you are going to have a nice nest egg later on.
$325 invested every month for 40 years at a 7% rate, is going to be $863.341,77.
4% from $863.341,77 will be $34.533,67 a year.
Giving you an income of $2.877,81/month. That’s more than your income and all you have to do is invest that money every month in an index fund. No special things like bitcoin or real estate investing. No stress regarding get rich schemes and other bullshit.
Just keep putting that money from your account > your investing account, reinvest everything. When your old and want to retire take out 4% a year from that account > normal bank account and your set for life. Easy peasy.
You won’t get rich this way.
One word of caution, you won’t get really ‘rich’ this way. This just shows you the power of putting some of your income to work for your future. Everybody should do this to have at least some money for later.
The real way to get rich is to provide value for people and selling that value at a good market price, selling products or starting a company in simple terms. More on that later on.
Until next time,
”You will not get rich saving a portion of your income.
But never saving is the way to being broke FOREVER.”