Building wealth is a three-pronged approach. It requires a job enabling you to care for your basic needs while building your safety net, preparing for retirement basics to supplement any social security income (you should also plan your retirement around your payable benefits — see if you can make it with early benefits, or can you wait and get the maximum distribution).
Now that you’ve prepped your life for sustainability, we want to get the third leg under us. Using a milking-stool analogy, it takes three legs for us to be stable as we rest on our butts.
A systematic method of investing will allow you to set aside money each month and let it work for you. The most frequent retort is “I don’t have money to invest!” Most often, people have not considered a priority in how they spend their money. At $100 per month invested, it is $1,200 per year.
Where do you get an extra $100 a month to invest? How about taking your lunch to work 2–3 times a week (that could be $25/week saved easily). If you purchase your soft drinks or coffee each day, taking it with you 2–3 times per week can also save another $20 per week. Prioritize your spending, and invest the difference.
Adjust as necessary
There will be times in your life where you have more money to put toward investing in your future, put away more during these times, and back-off when your circumstances require more cash at home (birth of a child, school expenses, braces, wedding), and resume when possible.
The principal theme here is to continue investing systematically every month. It needs to become a habit that you maintain at some level without fail. Remember, this is investing in your future, and you are NOT to pull money from these investments as the whole purpose or your safety net and emergency savings are to cover those expenses.
Investing is the magic that helps you build that million. Saving alone cannot create the wealth which is possible with the compounding available in investing.
Let me explain: You invest $100 a month. At the end of a year, you have $1,200 if you put it in a jar. In 10 years, you would have $12,000 and $24,000 in 20 years. Should you invest, you are working with the possibilities of compounding your investment.
Have you bought a house? You borrow — let’s say $100,000. For simplicity’s sake, let’s say you get a loan at 5%. You aren’t paying $100,000 + 5% for the loan ($105,000). It is based upon the length of your mortgage, and the bank always gets the interest first. Payments on a 30-year mortgage would be $537 per month ($6,442/year). You will pay almost double for the house — $193,255.
By investing, we use the stock market to make compounding work for you. It works basically like this: You purchase $100 worth of stocks (through a mutual fund or another financial vehicle) each month. Over a year, you’ve invested $1,200. The value of stocks and bonds increases, most of the time, and some pay dividends. After a year, your $1,200 investment could be worth $1,320 (the stock market has historically shown an average 10% return over 30 years) in 30 years that could be $229,971, and that is only by investing $100 per month. You’ll have times where you can afford to put more into your investments than others. The more you invest early, the less you’ll have to put in later. You should always strive to put at least $100/month into your investments.
These three steps will have you well on your way to financial independence, where you, too, could retire as a millionaire. There are hidden dangers that have ruined more than one person.
It takes dedication and iron will. Icewater may be flowing through your veins at times if you can resist these urges — but market fluctuations have dealt catastrophic damage to some financial plans, as people lose their nerve and run to sell what’s left of their investment portfolio when the markets take a downturn.
Let me clue you in on a professional secret (it’s not a secret). The market always goes up and down. Sharp declines are followed by sharp — or even stair-stepped increases. The stock market is not a casino where the house has the advantage. It is merely a place where people buy and sell shares of companies. You have stock in a company, and it’s worth determines the worth of the company. Do not put all of your eggs in one basket, because some companies do fail. That is why we diversify and buy stock in a minimum of at least 12 different companies, or we hold mutual funds which are themselves diversified and invested in many companies, and other financial instruments.
The best thing is to set it up and let someone manage it for you and forget it. Keep tabs on how your portfolio is performing, but do not watch CNBC or other financial networks and fret over every change in the stock market. Things are always up and down. Sectors of the market go up, and others go dow. In the end, if you stay in you’ll be fine!
As you get older and nearer to retiring, you’ll want to move a substantial portion of your investments into less volatile stocks and bonds, so you’ll not worry about fluctuations in value as you begin withdrawing from your mature nest egg. More stability will allow you to live comfortably in retirement.
I hope you enjoyed this read, and are inspired to put your money to work for you. You deserve it!