Investing Basics: Part Three
This is Part 3 of a super-special Whiteboard Wednesday series, where we’re talking about the basics of investing.
This Is Not a Pitch.
This Whiteboard Wednesday series is based on my book, Invest Like a Pro, and I’m going to give you all of the information from the book in video form. You can simply follow along with the series, or get the book on Amazon—for 99 cents—or grab it for free on Kindle Unlimited.
… all that you have to invest, in order to get this information, is your time. Save your dollars for the actual investing (which I hope you’ll do very soon).
Investing Is Like Gardening
The point of investing is to become wealthier, right? You have goals—like retiring, paying for a wedding or buying a car in eight years. Whatever it is, you need to be able to grow your wealth sufficiently to be able to make it happen. You invest your money (plant your seeds), and then you watch those seedlings develop until they’ve blossomed into a healthy retirement account, for example.
So, let’s break down the components of investing that assist with growth. In the same way that fertile soil, sun and water affect the yield of a crop, these components affect how big your pile of money will be at the end of your investing horizon.
Today, we’ll go over two key components: amount and time.
Save Those Excuses. In Fact, Just Save.
It’s probably no surprise that we need to be cognizant of our saving habits. How much are you saving? How much time do you have to save? If, or when, you stop saving, how long does your investment have to grow on its own? And what’s the rate of return?
Now, “amount” is super easy to cover because there’s this crazy relationship where, all else equal, if you invest more, it will grow to be more. Mind blown!
So carve those dollars out of your budget and put them to work getting you more dollars. OK?
Cool. Now that we’ve got that one—investing more is better—let’s move on …
Ti-i-i-ime Is On Your Side. Yes, It Is.
There’s one example of how time can affect your investment success that totally fascinates me—and I’ve looked at these numbers over, and over, again.
Let’s assume that we have two people of the same age …
The first person watches her pennies and starts investing, just $200 a month, at an 8% rate of return. (Don’t think too much about the 8%—forget about taxes or inflation for now. Just assume that the end result is an absolute return of 8%. We’ll talk more about rates next week.) When she hits age 50, she has a bit of a mid-life crisis and actually stops investing.
If we flash back, we can see that our other 30-year-old is not investing at all. When he reaches 50, he sees that his female friend, who is now also 50, has stopped investing and suddenly has a little more disposable income. He’s thinking to himself, “Whoa. I’ve got to get started!”
So, he decides to triple his friend’s $200 monthly investment, and commits to investing $600 per month at the same 8% rate of return. Keep in mind, though, he’s starting at the age of 50, 20 years later than his friend started.
More Time, More Money.
At 65, How big are their piles of money?
- He started at 50 and invested $600 per month at 8%. In 15 years, at 65, he ended up with $200,000. Not bad.
- She started at 30 and invested just $200 per month at 8%, until the age of 50. In 20 years, she ended up with roughly $400,000.
You read that right. The woman in our example started 20 years earlier, invested a third of the monthly amount that the man invested—at an equal rate of return—and her pile of money grew twice as big!
That is interesting math. Hopefully they’ve both hit their goals, whatever those goals were.
It’s Never Too Late (Even If Earlier Is Better.)
So, obviously, if you want to really grow your investments, the more you put in, the better. But also, the more time you have, the better. That’s why we say start early. But. Yes, there’s a but. As you’re watching this Whiteboard Wednesday video, or as you’re commenting about it on Facebook, don’t think for a minute that, “It’s too late for me.”
It’s never too late.
You missed out on investing yesterday—but you haven’t missed out TODAY. Don’t miss today. At the risk of sounding all “carpe diem”, I’ll point out that we don’t want you to miss tomorrow, either, so …
Start investing right away!
If you’re new to investing, and maybe a bit afraid of it, keep watching this series. We’re going to talk all about the exact nuts and bolts of getting started. We’ll also dispel some common concerns and show you exactly how to truly invest like a pro—actually, we’ll show you how to invest better than 70% of pros.
Good? Great. Next week, we’ll go over the third critical component of investing, rate of return. Then we’ll break down how to invest in a way that’s really, really actionable. Remember, we want you to be able to start right away! See you then.
If you can’t wait until next week for more whiteboard wisdom, subscribe to our YouTube channel.