Good morning and welcome to the first “real” post of MMYW. While I will be writing the Real Estate and alternative investing posts, I am pleased to introduce Derek Sall from LifeAndMyFinances.com as staff writer for the stock and shares investing posts. Today, Derek talks about the importance of investing.
Do you currently invest any of your money for your future? Surprisingly, many people don’t. They think that they just don’t have enough money to invest. But is this really the case? Even if it’s not, how important is it really to get started with investing anyway? After all, you’ll probably only be able to invest $100 per month anyway. It just doesn’t seem hardly worth it. Let me tell you though, it absolutely is.
The Years of Over-Consumption
What’s the typical life pattern for most people? They start school when they’re four or five, they get through grade school, then middle school, then high school, probably college, and THEN they finally start their careers (assuming they don’t immediately go into graduate school). Or they can have a cheap winter days out around London. At this point, they probably have $25,000 worth of debt and they have very little cash in their bank accounts. Are they thinking about investing? Absolutely not! They’re just thinking about how to handle their bills and survive on their own.
Within the first couple of months, that college grad can head in two very different directions. First, they could continue to live an inexpensive lifestyle (like they probably did in college) and pay down their college debt in less than two years, and then invest heavily in their future. Many, however, are deciding to head down the opposite path. After graduation, instead of paying down their debt, they decide to say, “Congratulations self! You deserve a new car for all that hard work you just did.” They then decide to “buy” a $20,000 car with the bank’s money. Instead of investing in their future, they have now put themselves $45,000 in debt.
So What’s the Difference?
When I graduated from college, many of my friends took the second option. The cars they purchased weren’t elaborate, but they were brand spanking new, and yep, they cost $20,000. Instead of being jealous when I continued to crawl into my rusted economy car, I just smirked and thought about what a different future we would have. Instead of dishing out thousands of dollars for a new car, I decided to invest my money into various money-making avenues.
Let’s compare the $20k investment that I made vs. my friend. What will these be worth in 40 years? Well, since a car is a depreciating asset and will probably end up in the junk yard long before the 40 years is up. I’d say it’s pretty safe to say that their $20,000 will turn into zero dollars. Now, let’s take a look at my $20,000. Even if I don’t add to this lump sum over the next 40 years, with a consistent 10% profit I’ll have one million dollars. Yeah, you heard me right. One Million Dollars.
So what would you rather have? A brand new car when you’re 22 years old or $1,000,000 when you’re 62? For me, I would much rather delay my gratification and have the million bucks later in life. If you agree, then I would strong advise you to start investing today. Whether you’re 22 or 52, the best day to start investing is today.
On a related topic, check out the importance of an early start on Reach Financial Independence.
Are you preparing your future? Do you regularly invest a percentage of your income?
This post was featured on the Frugal Rules, Money Bulldog, Prairiee Eco Thrifter, Modest Money, thank you!
The advantage of investing at early stage of our life is the power of compounding interest. You are letting your money to make more money for you. This is called cash creating assets or or investment. That is why it is practical to invest into assets than acquiring a lot of liabilities. Because, I would like to have a million dollar money (or investment) when I get old than an old car..
Walt@MyWealthDesire recently posted…The Cost of Child’s Education and Quality of Education
Compound interest is amazing! Sometimes I marvel at the number of zeros in the calculators, starting with a very small sum it grows incredibly big. I’d take the million too instead of the old car 🙂
While I completely agree with you on investing and instead of choosing to spend your money on other things people just refuse to look at it that way. I get more of the what if you die tomorrow and live life to the fullest. I say don’t be spend and live life but plan like there is a future as well. Nice post!
Thomas | Your Daily Finance recently posted…Paying For College with Federal Student Loans
Well if you live to the fullest, you’ll have to work to the fullest when you are 75 because you’ll be broke! I’d rather stash a little on the side…
I do have a percentage taken out each paycheck for my 401k and ESPP. Definitely nice to see it slowly build up over time.
DC @ Young Adult Money recently posted…$480 Cash Giveaway!
and the day it will bring more interest than the capital invested, pure joy!
I invest a pretty sizeable chunk of my money. I tend to be a bit of an oversaver, but I really enjoy seeing the numbers get larger!
I am quite the money hoarder too. It is the only time I enjoy doing spreadsheet work, to update those numbers!
I 100% agree that it’s important just to start, even if you’re only putting away a small amount at a time. Simply forming the habit of saving regularly is such an important part of investing. Thinking you’re going to start “later” is a recipe for never starting at all.
Matt Becker recently posted…Questions to Consider When Choosing a Health Plan for Your Family
When you run the numbers for investing now and then nothing in your 40s and 50s you still have a sizable retirement fund, while if you do the other way around and just invest in your 40s and 50s you won’t have half the money.
I totally agree on starting as early as you can. Time, in my opinion, is one of the most overlooked aspects when it comes to investing. Even if you’re only able to start with a small amount that money will build up over time as well as help establish that discipline.
John S @ Frugal Rules recently posted…Who Knew Buying a Mattress Could be So Much Fun?
I don’t like discipline, but automation takes care of that. Set it up, forget about it, watch it grow.
We invest regularly in Roth IRAs, traditional IRAs, and other mutual funds. It is absolutely key to start as early as possible to maximize long term gains like you mentioned. Sadly, many at 22 are not aware of or interested in investments at all. I know I wasn’t.
Brian @ Luke1428 recently posted…Investing Made Easy (Part III) – Where Should I Put My Money?
I am so grateful I was conscious of that in my 20s. My lazy side knew making up for the time spent not saving would be harder and more costly than starting now.
People don’t look at the the total cost of having the new car or what you might be giving up to have it. I was guilty of that myself and certainly wish I could have part of the money back that was spent on stuff I didn’t need. I did start putting money in retirement right after I got my first job, so all is not lost, thankfully!
Kim@Eyesonthedollar recently posted…In The Summer I Spend the Most Money on Vacations-$480 Giveaway
Once I tried to sum up all the money I had made in my life, from any job. It was hard remembering all the little side gigs but you get a rough idea of how much you earned in your life. Comparing to your net worth is pretty eye opening.
Over-consumption is a great way to phase it…which helped society move from delayed gratification to instant gratification. What could be better?
IMHO, people focus on investing as though it were a single action, rather than a process. Saving money once is not enough…investing it once is not enough. You’ve got to have a plan, then follow it without exception. (plan your work, work your plan). One aspect of you plan: max out your tax-deferred accounts. If your plan includes long-term investments, dollar-cost averaging and rebalancing are important parts of the process.
Once you’ve identified what you want, figuring out a process to get it becomes much easier.
It gets much easier once you get the ball rolling. I know this is one of the rare areas where I don’t procrastinate because it would cost much more, financially and as an effort, to get up to speed later on.
I bought that $20,000 brand spanking new car right out of college. I’m still driving it 7 years later and it’s been generally problem free (unlike the beater it replaced). Also, my wife and I dropped over $150k in risky investments by age 26 that have not and probably will not pan out. However, since then (that is, within the past 3 years) we’ve seen strong income growth, purchased three rental properties, and made a number of other investments that we have high expectations for. Today our net worth is growing rapidly, and we are able to give away 15-20% of our income while saving and investing another 30-40%. Overall I’m pretty pleased with our progress, and expect we’ll be financially independent within a decade.
Looks like you really turned your life and finances around Jonathan! Living on half your income is amazing, and congrats on giving such a great proportion of it.
Thanks – That said, I didn’t mean to indicate that our lives or finances were out of control, we just weren’t as careful with our investments. Other than the car purchase, we were both good savers right out of college. The main key, though, has been that we have only modestly increased our lifestyle while our income has gone way up.
That is key. If you live on half your income and start from scratch, financial independence is about 15 years away. With some savings already, you can shave a few years off easily.
Congrats on the new site!
As for my investing, step number one is paying down debt. In one sense, it is like getting a guaranteed return.
Michael @ The Student Loan Sherpa recently posted…Thoughts and Lessons from the Interest Rates Doubling
Thank you Michael! It is indeed the safest way to “invest” and grow your net worth. And the chances you’ll beat credit card interest rates in the markets is very slim.
Congratulations on the new blog Pauline!
This is a very fitting first post. One of the best ways I can think of to make money is to use your money to do it for you. For a long time I’ve known that it is better to buy assets than to buy things that will simply lose their value. The more of these things I collect, the more I know I’m on the right path.
My Money Design recently posted…How the Lower Taxes From a Long Term Capital Gain Can Work Into Your Early Retirement Plan
Thanks MMD!
A fun read, Derek! No matter how many times I see such figures, they are always a good slap in the face. Thanks goodness I could not afford a $20,000 car at 22. Glad we began investing when we did or I’d have to slap myself in the face right after reading this fine article.
cj recently posted…Smelling the Roses
Don’t slap your face just yet CJ, there is a whole series coming up about how to make up for the past and prepare for the future!
Oh, thank goodness, especially since I am in a cafe right now.
cj recently posted…Smelling the Roses
I agree. The smart decisions you make when you’re younger can come back and help you much later one. Not all of my decisions were smart ones, but enough were smart that they seem to balance out the regretful ones.
Alex @ Searching for Happy recently posted…Too Much of a Good Thing
Positive balance and a few good lessons, that is the most important to look forward to a bright future.
The importance of starting early simply cannot be overstated!
William Cowie recently posted…Legends: Should You Follow Them?
I put a small amount away in retirement each month. It’s not much, but my work does not offer retirement benefits so it’s all up to me!
I never used the company retirement match even when provided, I preferred to invest in real estate and in accounts I could use before turning 65.
I’ll take the million dollars any day. I think better education about money, compound interest and investing is really needed in our high schools and colleges. at 18 or even 22 it’s really hard to think that far in advance, but when you do, it clearly pays off.
KK @ Student Debt Survivor recently posted…Swimming in Debt or Lifeguarding?
Hi KK! just saw you on business insider, congrats 🙂
Yes it makes a big difference if you start early or you can make up for it later with more discipline.
Thanks to finding the PF world early on, I’m becoming more educated. 🙂 We are saving about 50% of our income.
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