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“I Don’t Get It – Why is Investing Important?”

So many people will ask me “why is investing important” and at the end of the day, it really boils down to one thing – a lack of financial literacy, or as we like to call it, The Language of Money.

What do we mean when we say, “the language of money?” Well, it’s simple, really. It’s all things about money and personal finance.

Let’s take a step back – what are some of your goals that you’re currently unable to obtain solely because of money? Some of the most common goals are:

  • Retirement
  • Traveling More
  • Buying a home/upgrading your living situation
  • Simply getting out of debt
  • Paying for children’s school, car, wedding, etc.
  • Paying for parents as they become much older in age and may need additional living assistance
  • Quitting work to volunteer more
  • Take a more enjoyable job that might have a lesser salary

Do you share any of these goals or maybe have some of your own that I have likely missed?  I can tell you that one financial goal that my wife and I share is that we want to have a lake house someday.  That doesn’t mean that we’re going to buy a $500K lake house or anything insane, but we want a place close to our house that we can travel to on weekends during the summer and enjoy the lake life.

And we’ve talked about what we might need to do to make this happen.  We very well might need to have our primary residence be much less than we can afford.  We might need to have side hustles.  We might need to live a minimalist lifestyle and only buy what we really need.

But most importantly – we need to invest!

You see, investing is the BEST Compound Interest Example that anyone can use to get on their way to financial freedom.

The best way to explain compound interest is that the earlier you invest; the more interest you’ll earn on top of interest you’ve already earned.  Let me explain with a very, very basic example.

The stock market has returned on average over 10% each year over the last 100 years.  So, if you invested $100, on average you’d make $10 that first year.  That next year you’d make $11 – $10 on your initial investment of $100 and then $1 on your gains from the first year of $10, since 10% of $10 is $1.

Let me show you with a chart because I personally am a visual learner.  If you invest $1000 in Year 1 and earn 10% each year, you’d have nearly $11K in 25 years:

See how that works?  You just keep earning more on top of the gains that you earned previously.  You can see the “Annual Gains” column goes up every year and that’s because you’re now earning 10% on top of the gains that you earned in previous years.  That “Total Gains” column just continues to rapidly grow like crazy and by the last year, you’re nearly making $1K just by letting that money sit!

And guess what – if you just let that money sit for another 10 years, your $10,835 would turn into $28,102 – a mere 159% over your Year 25 total!

Are you starting to grasp why investing might be important?  This type of basic analysis is one that was very eye-opening to me when I got started on my investing journey and it’s the true fire behind everything that has been done in our lives from a personal finance perspective.

This might seem fine and dandy but I know some of you are questioning some things that I seem to be missing out, such as:

  • The market doesn’t return this every year
  • Inflation
  • Investing is Risky
  • I don’t know how to invest
  • I don’t have enough to invest

Well, I think that these are really just 5 excuses of why you shouldn’t invest, to let me debunk them really fast:

  • The market doesn’t return this every year
    • Agreed, but this is the average.  You’ll have bad years and good years so as long as you’re invested for the long-term like we recommend, you’re going to be in a great spot
  • Inflation
    • Inflation is going to be there no matter if you invest or not.  Typically, inflation is 2-3% so if you want to be conservative, just assume you’re going to get 7% returns instead of 10%.  If you choose not to invest and earn .01% interest in a savings account, then you’re losing 2-3% each year instead of making 7%!
  • Investing is Risky
    • False.  So false.  Blind Investing (trading, really) is risky if you just follow CNBC analysts and don’t do your own research.  Subscribe to the Sather Research eLetter if you’re looking for a place to start as his portfolio is constructed on buying undervalued companies with growing dividends
  • I don’t know how to invest
    • Again, you can subscribe to Andrew’s eLetter.  Or, even just start small with our Free PDF that you can download to give you some of the ins and outs to make you knowledgeable enough to be dangerous.  Similar to your returns, knowledge will compound.  The more you try to learn, the more that you can build on that foundation, so start now! And if you’re really struggling, you can put your money into an S&P 500 ETF like SPY!
  • I don’t have enough to invest

Let’s take a bit of a step back now and talk about two different methods that my wife and I invest as much as we humanly can. 

1 – Provide a better life for our son

This is really #1 for us.  We want him to have any opportunity that he wants so we work very hard to be able to make sure that a financial hurdle won’t get in the way.  We do this two different ways:

We invest $75/paycheck into a 529.  A 529 is a tax-advantaged investment account where you can put in after-tax dollars that grow tax-free and can be used for furthering the education of whoever the account holder is, including things like college, technical schools, trade schools, private grade school and more!

$75/paycheck might not sound like a ton, and it’s not, but in 18 years it’ll be right around $80K using an 8% investment return with this NerdWallet compound interest calculator:

Not bad, right?

This might not get him 100% of the way there but it’s a really good start to give him a good baseline for his education should he choose to go that route.  If not, that money can then be regifted to a different person in the 529 or we can even simply pull it out, although we will have to be taxes and fees, ruining the benefit of using the 529.

Additionally, we invest $100/month into the riskiest stocks that we possibly can in hopes of hitting it big for him.  The goal basically is that if you invest $100/month from when he’s born to age 65, he would be a millionaire with just that money.

Now, that would make us 95 years old, so we might still not be contributing $100/month when he’s 64 years and 11 months, but the thought is that if we can build up this nice little “bonus nest egg”, he can take some for himself and then also take a chunk and siphon it off for his children (if he has any). 

In a quick summary, we’re trying to literally create generational wealth for our family for years and years to come, and we’re doing it with $250/month and starting super, super, super early.

The thing with compound interest and investing is that it comes down to money and time.  You don’t have to contribute a ton of money and start very early to have massive gains, but if you can do at least one, you’re going to be miles ahead.

We’re choosing the time route and started very early, and we think you should, too!

2 – We want to have a lake house some day

This goal is much more materialistic but it’s one that we really, really want to have someday in our lives.  Now, I have no idea where it would be, the cost, the size, or anything like that, so how would we actually save for it?

Well, we can just throw a bunch of money into a savings account and let it sit there and not earn any interest, or we can take a different route, which is actually the same sort of thing that I did when I first started investing.

You see, saving for retirement is a nonnegotiable item in our family.  It’s one of the first things that we do in our financial order of operations.

We decided that if we wanted to get a lake house, we were going to start saving $0.00/year for it!

Yes, that’s not a typo.  We weren’t going to save at all.  Instead, we were going to save EVEN MORE for retirement. 

Yes, you heard me right.  Save $0 for our goal and save more for the non-immediate goal.  But why?

Well, here’s my thought – if we could basically “frontload” our retirement savings and save even more now, we will get the benefit of having that money in the market for extra time.  That extra time could mean, in theory, we would need to save even less money than what we were originally planning. 

For instance, let’s look at two different situations below where someone wants to save $1 million by age 60.  In the first example, that person will invest the same amount each year at an 8% return from age 30-60 while the second person will invest from age 30-40:

As you can see, the second example requires that person to essentially invest $12K/year from ages 30-40 (11 years) while the first person basically has to invest $7,500.  But once person B hits age 41, they no longer have to invest anything, and instead just let that money keep growing at 8% each year.

At the end of the day, they have about the same amount of money at age 60 while Person A invested a total of $232,717 and it only took Person B $131,285 to get the same amount of cash.

And the best part is, Person B is now “used to” investing about $12K each year but at age 40, they’re done.  $12K from ages 41-60 is worth $238,700!  They could take that money and throw it into a mortgage for a lake house, right?

Using the $7,507 that Person A is investing, that’s still $150K that they’re not having to invest from 41-60!

In essence, the earlier that we can start saving for retirement, and the more we can save, will give us the ability at some future point in life to say, “you know what?  We’re good.  We don’t need to save anymore for retirement.  Let’s spend this money on a lake house, vacations, anything that we want to, because we put in the groundwork in our thirties!”

That’s the conversation that I cannot wait to have and it’s solely because we started investing early and squeezed out every single dollar that we could to put it into the market.

Now, please be aware that investing all starts with budgeting as you have to make more than you spend.  Start with a good budget and then move to trying to increase income and cutting expenses.

Once you have that budget surplus working, that’s when you can really begin your investing journey.

My honest advice is to listen to the podcast and become a subscriber to the Sather Research eLetter.  The beauty of being a subscriber is you get access to all of the previous eLetter episodes as well, so not only can you see ALL of Andrew’s stock picks, but you can go back and read his theory on why those stocks would do well so you can start to get in his mindset and LEARN!

Yes, making money is great, but it’s even more important to learn so that eventually one day you can be a successful stock picker!