Investing Isn’t Just for Experts

Does the idea of investing scare you? Does it seem like one of those things that only sophisticated experts with advanced degrees in finance can really understand? Does the stock market seem like a horribly complex system from which no average person can hope to benefit?

If so, you’re certainly not alone. The reality is, however, investing is not just for the experts! With some basic understanding of a few simple concepts, you will on your way to making some serious money for the long haul.

Let’s jump right in.

First, let’s start off with the concept of stocks. When you buy a stock, you are essentially just buying a piece of ownership in a company. Each unit of ownership is known as a “share.” You are paying some amount to share ownership of the company. As a result, the company you invest in is able to use your money to grow the company. It can be a win-win for you and the company if it does well. They get to use your money to grow and your piece of the company pie increases in value.

But, isn’t it risky to invest in a stock? Absolutely. When you invest in a single stock, you could make an incredible amount of money. If you had invested $5000 in Amazon when it first started, you would have well over a million dollars today (check out this Business Insider article to see how much $1000 invested in various large companies would be worth now). But, if you had invested your money in Pets.com, an exciting stock during the tech bubble of the late 1990’s-early 2000’s, you would have seen your money disappear faster than Lindsay Lohan’s career.

Wouldn’t it be best to stay away from the stock market altogether, then? Why not just keep all your money in the bank?

The problem is that even though this sounds like a safer bet, you have to consider another type of risk that will catch you from behind: inflation. According to Wikipedia, the infallible source of all things credible, “inflation is a sustained increase in the general price level of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services.” In other words, your dollar will be worth less next year than it is worth today. The average rate of inflation is about 3% in America, so every year you’re losing 3 cents out of every dollar. Add to this the problem of compound interest working against you, and your money sitting in the bank will actually be losing value exponentially with every passing year. Even the online bank I use with one of the best interest rates around only earns 0.75%, meaning I lose 2.25% to inflation every year.

While individual stocks are risky, the stock market as a whole earns an average of about 8-10% per year. One measure of the overall stock market is called the Standard and Poor’s 500 (S&P 500). The S&P 500 is a list, also known as an index, of the 500 largest companies. This index of companies serves as a representative sample of the stock market as a whole, and is well-regarded for doing so quite effectively.

The whole idea behind taking advantage of the high returns of the stock market is to diversify your investments. Instead of investing in 1 or 2 stocks which could skyrocket or plummet, you want to invest in a large number of stocks which will balance each other out. The easiest way to achieve this diversification is to invest in a mutual fund.

A mutual fund is like a basket of stocks. Imagine you pool your money with hundreds of other people who want to invest in stocks. You put this money in a huge pile and let a skilled manager pick tens or hundreds of solid stocks with excellent proven history. This type of mutual fund is known as an actively managed fund because a portfolio manager, a brilliant expert who spends every day analyzing research on companies, manages the portfolio of stocks which you as a big group of investors are investing in. Another type of mutual fund is an “index” fund. One of the most common types of index funds is the S&P 500 index fund, which simply invests money in the 500 companies that make up the S&P 500. This type of mutual fund is easy to invest in, requires minimal knowledge of investing, and actually outperforms most actively managed funds, anyway. In fact, Warren Buffett, the second-richest man in the world, recommends this type of mutual fund for the average investor.

In the next post, we’ll discuss what to look for in a mutual fund and how to actually start putting money in one. I can assure you, it’s a lot easier than you think!

Mankind’s Greatest Invention

Do you hate math?

If you do, I’m convinced you’re going to love it by the time you’re done reading this post.

Why? Because of the magic of compound interest.

Albert Einstein once reportedly called compound interest “mankind’s greatest invention.” While Snopes might dispute whether Einstein was truly the source of this claim, there is no arguing that compound interest is an incredible mathematical beauty.

The idea behind compound interest if fairly simple, and it goes like this: Let’s say you invest $1000 in the stock market, and the stock market gives you a return of 10% annually. After one year, you will have $1100. You’ve made $100. Now, if you leave that $1100 in the stock market, you don’t just earn 10% interest on the original  $1000, but also on the $100 you earned over the last year. You’re earning 10% on the entire $1100. After your second year, you will have $1210 ($1100 + 110). After year three, you’ll have $1331.

At first, this doesn’t sound like much. And it isn’t. But if you leave this snowball rolling, the numbers start getting exciting. After 10 years, your money will have turned into $2593,74. After 30 years, that little $1000  becomes $17,449.40.

You know what else is crazy about these numbers? 10% isn’t too far off what you might expect to make on average each year by investing in mutual funds (more on those in my next post). More conservative financial advisors might argue that you should only plan on 8%, but anywhere between 8% and 10% isn’t unreasonable, historically.

At my age of 22, if I assume I retire at the typical retirement age of 65, every dollar now could be worth over $60 in retirement. 

Ever since looking at these numbers a couple of years ago, I have started to think of money in terms of its potential value. Sometimes, if I’m thinking of buying a Frappucino from Starbucks, I’ll stop and think, “Would I rather spend $5 on this Frappucino or have $150-$300 in retirement? A $50 meal at a restaurant could be worth $1300-$3000. Spending $3000 more on a car than necessary could cost $80,000 to $180,000 in potential dollars.

Of course, I don’t always think in this way or I would never be able to enjoy my purchases. I love taking my wife out on dinner dates, going to movies occasionally, and otherwise enjoying life. Nobody wants to go through their entire life as a complete miser for the sake of retiring with money. However, I have found this method of potential-cost analysis to be helpful in talking myself out of spending money on things that won’t really contribute value to my life.

Dave Ramsey uses a particularly compelling example of two young guys, Ben and Arthur. Ben, at age 19, starts investing a couple thousand dollars per year until he’s 26 years old, and then stops. After 26, he never contributes another dollar. Arthur decides at 27-year-old that he should probably start putting some money away. He starts investing the same $2000 per year, but does so until he’s 65. In the end, even though Ben only saved for 7 years and Arthur saved for 38 years, Ben still came out ahead with almost $2.3 million compared to Arthur’s $1.5 million. The message is clear: start now!

When I graduated and started my new job at the beginning of this year, I started putting 15% of my income into retirement. It’s thoroughly satisfying to watch the numbers climb and to realize that all of those dollars are going to grow exponentially  over time. One day, at least a couple of decades from now, we’re going to hit a crossover point where the interest generated from these investments creates more money every year than we do by working for an income. That’s where compound interest really starts getting exciting!

Have I succeeded in making math your friend for once in your life? If so, let me know in the comments below.

Do you currently invest money for retirement? If not, feel free to share your thoughts about what’s holding you back!

Giving Doesn’t Make any Cents

Giving is kind of like flossing.

Everybody agrees it’s a good thing to do, but hardly anybody actually does it. The less you do it, the less you worry about it, until once every few months when you’re reminded that you really should do it more often.

On the face of it, giving doesn’t make financial sense. You’re giving up a good chunk of your income and detracting from your net worth. You’re letting go of money that could be saved or invested, and you’ll never see it again.

And yet, in my opinion, nothing you do with your money could be more valuable or important. You see, if you never give, you’ll never really be happy with your money. If you never give, you’ll never be content. If you never give, you’ll be tempted to think you can find your happiness, value, freedom, and peace in money. As much as I appreciate money, it can provide none of these things. You’ll always feel like you’re chasing after something you can never attain.

Money tells us a lot about our core philosophy of life. Show me your bank statement, and I’ll show you what you care about. I could tell if you love entertainment, sports, eating out, parties, travel, and the like. But could I tell about your love of people? Would I see financial contributions into the lives of those around you? Would I be able to tell you’re enthusiastic about changing some part of the world, or would I just see personal expenses?

For us, personally, as Christians, my wife and I believe strongly in the practice of tithing (i.e. giving ten percent of our income to the church). A solid church that manages money well will allocate these funds toward helping the local community and helping needy communities overseas. I can tell you from experience that I have tithed since I got my first minimum wage job at 16 and have never missed that 10% of my paycheck.

Even when I was barely scraping by and spending $400 a month of my measly income in gas to commute to work and school, I never once regretted my giving. I never thought I should have skipped it that month. Fast food, entertainment, and gadgets have caused me regret in my budget, but never giving.

In addition to this 10%, my wife and I find tremendous joy in sponsoring a child through Compassion International. For just $38 a month, this organization provides kids in impoverished countries with nutritious food, education, skills, love, and spiritual teaching. Yesterday we received a letter in the mail from our little six-year-old Juan with a hand-written note and some crayon artwork to post on our wall. The letter was a wonderful reminder that every day that I go to work I am not just supporting myself, but I am helping support a small child with big needs.

Would you join me in challenging your giving? Whatever your level is now, let’s “kick it up a notch,” as chef Emeril would say. For us, we want to introduce a “spontaneous giving” category into our budget, which we can use to give generously to anyone with extraordinary needs throughout the month. This could be a single mom in our church, a waiter at a restaurant who could use a lavish tip, or a missionary in need of funding. Think about something that excites you to contribute toward. If you don’t have money to give right now, volunteer your time. To name just a few possibilities, there are organizations that:

Whatever you’re pumped up about, go with it and start giving something! Your heart will follow your money.

An Introduction to The Gradual Millionaire

It’s sad how long it took me to come up with the title of this blog. I sat here tossing around cheesy ideas like the “Frugal Fighter,” “Net Worth Giving Up,” and “The Money Tortoise” (like The Tortoise and the Hare…get it?). I’ll leave these things to the professionals.

You may have spotted a trend in these names. I’m excited about building wealth over the long haul. This is no “get rich quick” blog, and you won’t learn about how to live an extravagant lifestyle of exotic cars and fine wine. I’m a 22-year-old married guy fresh out of college here to share my new journey with you toward financial independence and freedom.

The first time I started getting really excited about the possibility of actually making a lot of money was about two years ago when I started my first summer internship. The internship was with a large financial institution, and as part of the program we learned the basics of investing, particularly in retirement. As I began to behold the magic of compound interest, I realized that not only could my wife and I retire as millionaires, we could potentially retire as multimillionaires. Or, better yet, we could be millionaires by 40-45 and be independent of traditional employment for the (hopefully) second half of our lives. I began to dream of traveling the world, learning new languages and instruments, starting a business, living wherever we want, writing books, volunteering time, starting a charity, and most excitingly, being able to give away large amounts of money to people and causes we love.

As time progressed, my (now) wife and I decided we wanted to get married. As part of our premarital counseling, we participated in Dave Ramsey’s Financial Peace University class, which gave instruction and practicable actions to ensure the success of our new-found financial goals. At that time, we were mostly interested in simply getting through the rest of our schooling without going into debt. But now that I’ve graduated and started my career, and my wife is only a couple of months away from doing the same, I’ve started to get more excited than ever for the possibilities that lie before us. I’ve started imagining what it would be like to pay off a house by age 30 and be free of a mortgage. How exciting would it be to fully fund our kids’ college and start them off in their adult lives debt-free (which I imagine will be even more unheard-of by the time they’re 18)!

So, will you join me in setting and going after some crazy financial goals? Will you sacrifice some of the instant gratification we can so easily get trapped in and embrace a greater vision of financial freedom?

Let’s start dreaming big and working hard!

What are some of your wild goals?