When I was younger and in elementary/middle school I (like most kids) knew nothing on investing, but for fun I would play with my calculator during down times doing what I would later understand to be exponential growth, but back then it was just a fun way to pass the time.
Open up your calculator app on your phone or computer and enter 1000. Then multiply that number by 1.01. You’ll get 1010. (Wow, really breaking some new ground there, Newton)
Hit enter again and you’ll get 1020.1 .
Until you get to 1104.6~. This takes 10 presses from the first.
Alright.. Enough Quick Maffs
When I was a kid I thought it was super satisfying (I really can’t explain why… Big numbers? Who knows..) to see that the build-up of the previous totals caused the next total to increase faster and faster.
Originally, you’d be getting a new total of 10~ more than the last each press, but once you hit 1100 it was clear you were getting 11 this time around. Not a huge amount, but after enough cycles of pressing enter until the next 100 you’d eventually begin to notice that the number of times you need to press for a whole number increase was lower and lower. At 2000 you’d get the next “step” up in 5 presses, then 4 presses at 2500, so on and so on until you hit 10000 and then all of a sudden every time you press enter you’re going up an additional point higher than the last time!
Now imagine you could get your money to do that… SURPRISE, you don’t need to imagine it because you can through investing!
Thought I Said Enough… But the Math Keeps coming
From the first post I made, I did an example where someone was spending $2950~ a month. For our example, to keep things clear, let’s say that this person was about to save about ~$1000 after these expenses. Below you’ll see two VERY different lines regarding what this person’s net value would be if they invested this money (Orange Line) versus if they let this money sit in a checking account or low interest savings account. (Grey Line)
It’s pretty simple to see that with an estimated 7% annual rate of return on your invested cash, you’d have nearly 3x as much money at the end of a 30 year period than if you had just let that money sit.
Why now? Can’t I wait some years to start thinking about this stuff?
Sure you can, but do you really want to miss out on the insane power of compounding? Take a look at this updated chart to see the difference a decade makes when accounting for the compounding. Person 1 started investing the second they saw this article and Person 2 (Green Line) invested 10 years later. What’s even more shocking is that this number is even assuming that Person 2 didn’t spend a dime of that cash sitting around and dropped it all ($120k) in at once at Year 10. A whole $200k difference because of that! We’re not even accounting for the likely-hood of this person being inclined to dip into these funds since they’re directly available.
Going another step further, look at the difference (Dark Green Line) of someone starting 20 years later with the same above assumptions. About half a million. It’s pretty astounding the power we have on our side given enough time and discipline.
But isn’t investing risky?
It would be unwise of me to say that investing in the stock market doesn’t come without risk. I mean, money doesn’t just appear out of thin air, right? Even though it does technically grow on trees…
Putting your money into another company through purchasing stock is inherently a risky venture. And I wouldn’t take any of my advice without doing your own due diligence and research.
What happens if the company goes downhill and bankrupt the second you put money into it? Will I really even get 7% returns per year?
This one is simple, the answer is that you don’t invest in JUST one company. Now THAT would be risky. Sure, if you invested in Amazon at just the right time back in the day you’d have made out like a true bandit, but how many Amazons or Googles or Facebooks are there? And how could you even know when they’re going to shoot up? So if you can’t predict which companies will do well then.. what do you do? It looks like this answer just turned into more questions..
Diversification of Investing
Fortunately all of these can be answered through one word. Diversification. On average the S&P 500 (A collection of the top 500 companies in the U.S.) returns about 10% annually (7-8% after taking into account inflation), meaning of the collective stocks in that basket, if you owned one of each, you’d get a return of about 10% of your money each year over the course of enough years. It’s quite scary at first to think to put your money at risk like that, since it’s a very real possibility to lose money in the market.
My dad did and has been hesitant to do so ever since, but that’s because he never gave his money TIME to recover. But the important thing is to stay the course and the odds are in your favor that eventually any losses you see historically tend to get re-gained given enough time. If you’re still skeptical (and rightfully so) take a look at this famous example of Bob the World’s Worst Market Timer . After reading that (along with the charts above) it can sometimes feel riskier, so to speak, to NOT invest in the market.
How Do I Start Investing?
I went to and came out of school (I was solely a computer kid back then) with almost 0 understanding of finances. I didn’t know the first thing about 401ks or IRAs or what a brokerage was. how to use one, or what stocks even were. The reason I tell you this because it is EXTREMELY straightforward to begin investing right away. Someone with no prior knowledge could do it with very little instruction. Maybe that’s both a good AND bad thing (But not for us!). The important thing, however, is investing intelligently and to your comfort/risk levels.
You have many choices when it comes to how you begin your investing adventures. If you’re looking to just get your feet wet, I recommend something like Robinhood which has a simple UI and sporting free trades. Just note that you won’t get any interest on your account for any money sitting in it. Not the worst thing in the world for someone who was planning not to invest in the first place. If you’re a bit more ready to take the plunge try making an account with an established brokerage like Vanguard or Charles Schwab. (You’ll get $100 FREE by using referral code – REFER6GZCJMGN) Both relatively simple and straight-foward. I use both and they each have their own pros and cons, so do your own research to see what fits your style best, but here’s some suggestions for where to get started.
Schwab – SWTSX – Schwab Total Stock Market Index
GoVanguard – VTSAX – Vanguard Total Stock Market Index
It’s honestly as simple as that. Both of these funds are of the “Total Stock Market Index” variety, meaning they’re index funds (A collection of different stocks managed by a group of professionals or a bot) which seek to track the performance of the U.S. Market as a whole. When you invest in one of these funds you’ll be investing in companies like Microsoft, Apple, Amazon, Facebook, Berkshire Hathaway.
Because they’re products of the brokerages themselves, they’ll be managed with extremely low expense ratios to you (An “Expense Ratio” is a cost for management of a collection of stocks, this is taken out of your gains per year at a cost anywhere from 0.01%-2%. We want to look for funds in the 0-0.1 range as much as possible) as well as being free of any commission. For most stocks or funds you’d need to pay $5-$10 each time you buy. For someone who will want to make trades whenever they’ve got leftover cash, this is great!
Again. Do you own due diligence here and read up more until you’re comfortable. The number one rule you should take away is not to invest any money you’re not comfortable with possibly losing.