I get it. Investing is a really intimidating, nebulous subject. If you’re like me, just hearing that word conjures up images of Warren Buffet, or Richard Branson. Your knowledge of it might stop right around the time you say, “I’ve seen Wall Street. The movie,” or, “I think part of my 401K is in the stock market?”
There, there–you’re in good company. The majority of people in America feel exactly that way, give or take a bit of confidence depending on your background.
But don’t sweat! I have great news for you.
Investing is for you, too!
It’s a pretty common misconception that you have to be considerably wealthy before you can start investing, but that simply isn’t true (not to mention backwards). Obviously there are exceptions. Some people are born into money, or they get rich and famous, win the lottery, etc–but generally speaking investing is HOW you build wealth.
You do not get rich from saving your salary and sticking it in your savings account down the road at your bank. You get rich from making your money work FOR you.
That’s investing. Investing is a fancy way of saying that you are putting your money towards assets that will in turn put money BACK into your pocket.
You’re doing yourself a disservice if you’re thinking, “I’ll invest once I’ve saved up a lot of money.”
There are two really big factors that determine how effective your investments can be in terms of solidifying your future. The first one is obvious–how much you invest. Duh.
The second factor is how early you invest. Thanks to the glorious magic of compounding interest, the sooner you get your money invested, the longer it’s able to grow without any extra effort from you. I plan on writing a post explaining this in more detail, but to illustrate what I’m talking about with actual numbers let’s do some math-ing.
Waiting to Invest Means Opportunity Cost
I’ll use an example from my own life to illustrate why waiting can be a bad idea. I had decided to aggressively pay off my vehicle. I bought it used for $17,500, and around the time I owed 13K I decided I had enough extra money to make triple payments and get the loan out of my life. That came to about $900 per month.
After about a year of spending an extra $600 per month of my vehicle, I decided to, you know, do some math.
I realized that at 2.9% interest, I paid less than $300 in interest that year prior.
What if I had invested that $600 each month instead?
If we assume a 7% rate of return, that would have come out to $8,123. That’s OVER $300 in return. Not by much, that’s true–but here’s the kicker.
That money would keep growing.
My car, on the other hand, depreciates by the day. If I had stuck with the original plan it would have been paid off in 3 years, with less than a thousand dollars lost to interest.
Meanwhile, I’d have accumulated nearly $25,000 in my investment account, not to mention however much money I could get for my paid-off car should I decide to sell it!
Opportunity cost is real, and you need to think about it.
Unfortunately I realized the flaw in my early-payoff plan later than I’d have liked, but this was a small scale example. I have friends with tens of thousands of dollars in student loans, and rather than investing their money, they’re making double payments each month. Imagine the opportunity cost one might face 10 or 15 years down the road.
I should have prefaced this by saying that all of this is subjective, though. Interest rates make all the difference. If you have an interest rate on your car, your loans, etc that is comparable or even higher than what you might be able to get on investment returns–pay that sh*t off, asap.
There’s no sense in investing if the interest on your debts is eating you alive, and you end up owing more than you started with down the line. That is never a good idea.
The bottomline is that you’ll probably always find a reason to wait until later to start investing. Your car, the trip you’re saving for, the remodeling project you’ve got going on–that’s life. The trick is to retrain your brain and remember that investing isn’t difficult, nor do you need a lot of money up front.
Invest Early and Often.
Even if you’re only saving 50 dollars per month until you’re back from France (which, I don’t know why you’re going to France without any financial runway but that’s a story for another day), it’s worth it.
Compounding interest is a magical thing and you’ll thank yourself later. There are plenty of options that don’t require a high minimum payment, or even a minimum at all.
Roth IRAs, if you qualify (and if you do qualify, OPEN ONE RIGHT NOW. Be smarter than me!)
There are options! Don’t make excuses–I do it too, every day, but don’t give up. Just get better! Better than you were yesterday, or last week. If you want to drastically change the path you’re on, you have to drastically change your thinking, and your habits.
Remember that if it were easy, everyone would do it.
Some Resources to Help You Out
When I first began learning about investment options, I felt like my head was spinning. There’s a bunch of jargon to learn, and there are so many articles to read, videos to watch, books, and every other kind of resource that it feels a bit like analysis paralysis sometimes.
You’ll find a lot of the info confusing and depending on what you read (and where), you’ll find conflicting information, too. The subject of paying down debt vs investing, for example, has been debated by many and will continue to be, no doubt.
This is because financial decisions are personal.
Remember what I said about interest rates making all the difference? Yeah. They do. This is why the debt payment vs investing debate cannot possibly result in a black or white answer.
Aside from interest rates, there are a ton of other variables. Do you have children? Where do you live? Do you have a medical condition? Are you a Kardashian?
Without knowing your exact financial situation, nobody can tell you exactly what to do. This is why it’s so important to educate yourself and get a wide breadth of influence.
Here are some links that I’ve found extremely helpful:
- Guide to IRAs
- Compounding Interest Calculator
- Brokerage Accounts Explained
- Investing with Little-to-No Initial Investment
Hopefully this helps! I’d love to hear about any other resources or ideas you may have.
If you’ve already started investing, what got you started? Was it easier than you thought?