Over the last few years I've had many conversations with people who make decent tech salaries, but aren't doing all that much with their money. Their earnings are often piling up in a checking account, like a mountain of gold in a cave.
But there's a way to think about money that some might not even know exists, or perhaps sounds intimidating enough that they don't investigate further.
Money is an asset that can be put to work to make more money. This is investing. Investing comes in many forms, with varying degrees of risk, attention required, and other tradeoffs.
For many people, the most logical and accessible mechanism of investing is the stock market. With a small appetite for risk and some initial starting capital, you can buy shares of companies that have the potential to increase in value as those companies put your money to work inventing new products, increasing efficiency, or creating entirely new industries.
Investing in the market in this way is one of the primary generators of wealth for an average person. A small bit of money, invested over time, with some rate of return on that investment, has the potential to grow into something meaningful.
If you have not started investing, the best thing you can do is to start as soon as possible, and automate your investments. Let's illustrate just how important it is to start early and invest on a recurring basis.
The rule of 72 is a calculation that computes how long will it take for an investment to double given a fixed annual rate of return. The historical average return of the stock market is about 10%. Given this rate, any dollar invested will take about 7 years to double in value. Ignore, for now, the obvious effect of forces like inflation on the resulting numbers in the rest of the post - we want to stay fuzzy and high level.
Assuming the stock market doesn't implode in the foreseeable future, you can run some quick math based on a starting investment amount and your age at the time of the first investment:
| Age | Value |
|---|---|
| 20 | $1k (initial investment) |
| 27 | $2k |
| 34 | $4k |
| 41 | $8k |
| 48 | $16k |
| 55 | $32k |
| 62 | $64k |
After 42 years of patience, and a bit of starting cash, you can live large on $64k in your old age. Not too bad.
This ever increasing rate of growth is due to compound interest and is the primary reason why it's important to start investing early. If you made your first investment at age 27, instead of at age 20, you'd lose an entire doubling period.
But of course, you'll be earning money throughout your career, hopefully getting a bonus here or there, or maybe getting some stock from an employer. Let's re-run our calculations with a recurring monthly investment of $1,000:
| Age | Value |
|---|---|
| 20 | $1k (initial investment) |
| 27 | $122k |
| 34 | $357k |
| 41 | $817k |
| 48 | $1.7m |
| 55 | $3.45m |
| 62 | $6.85m |
Wait, what? From $1k to nearly $7m by investing $1k per month? How? Compound interest.
These numbers are fuzzy of course (markets fluctuate, you may skip a few months or need to withdraw money for life events, etc), but they represent a broader truth: setting aside a fixed amount of money every single month, slow and steady, has the power to grow into something multiple times larger than the raw amount of cash invested.
Okay, one more illustration to hammer this point home: starting to invest as soon as you can is the single best thing you can be doing right now.
Let's compare Ash and Misty.
| Ash | Age | Value | Misty | Age | Value |
|---|---|---|---|---|---|
| 20 | $0 | 20 | $1k (initial investment) | ||
| 27 | $0 | 27 | $14k | ||
| 34 | $1k (initial investment) | 34 | $39k | ||
| 41 | $14k | 41 | $88k | ||
| 48 | $39k | 48 | $184k | ||
| 55 | $88k | 55 | $371k | ||
| 62 | $184k | 62 | $735k |
Ash and Misty both contributed diligently, but Misty started two doubling periods earlier. These extra doubling periods mean that Misty and Ash are making very different late-life decisions as they plan for retirement.
You could also use this framework to think about the lifetime cost of any large purchase. Imagine Ash and Misty are deciding whether or not to buy a car. Ash spends $30k on a new car, Misty forgoes and instead invests that $30k in the market without contributing any additional investment.
After two doubling periods, or loosely 14 years, Ash's car is probably not worth a whole lot: maybe $3-5k on the used market. Misty's investment has grown and compounded, and is now worth nearly $120k. That $30k car turned out to be a lot more expensive than Ash realizes.
It seems unwise to use this framework to evaluate every single purchase in your life, or use it as a justification to avoid making purchases that would create lifelong memories with your friends and family. A cup of coffee that will make you happy today is worth it. Don't overthink the fact that your $5 would be worth $273 when you retire. That's no way to live.
If you want to play around with more compound interest numbers, check out this calculator.
This is not investment advice. Take the time to research and find the tools and investments that feel right to you. Don't invest money you can't afford to lose.
I want a simple life where I don't have to pay a lot of attention to market movements day to day. As a result, I choose to invest passively in low-expense ETFs. An ETF, or an exchange-traded fund, is a collection of other assets (usually stocks), that can be traded itself as an individual stock. Go read up on ETFs for more information, I won't be able to explain it as well as the pros.
Generally I want my money to be invested in a wide array of industries, with varying risk profiles. I've chosen Vanguard as my preferred platform to trade because of their low management fees on their own ETFs.
Here's the list of funds that I've put money into over the years: VBK, VBR, VIG, VNQ, VOE, VOO, VOT, VTI.
If I had to recommend a starting point, I'd just put money into VOO and call it a day.
I have a recurring automatic investment on the 1st and 15th of every month that goes straight into Vanguard - this aligns with my paycheck schedule. I never want to see this money in my bank account because it will be too tempting to incorporate it into my budget for daily spending. Putting the money straight to work means that I'm also taking advantage of dollar-cost averaging, which is useful for reducing the impact of short-term market volatility on a portfolio.
The amount of your recurring automatic investment is up to you, but generally I recommend the following:
Here's a handy flowchart from /r/financialindependence that illustrates these bullet point priorities in a more visual way.
In addition to your monthly recurring investments into the stock market, you should be keeping your eye out for additional investment mechanisms that provide tax incentives or match a certain amount of your contribution.
The constant up and down movement of the markets day to day, watching your money shrink and grow, is immensely distracting and stressful. I don't recommend it. To avoid this stress myself, I set up a recurring monthly appointment where I take stock of my...stocks.
On the first of every month I review credit card statements, re-invest any cash above my "peace-of-mind baseline", and get a mental snapshot of where my money is working. It takes about 30 minutes each month, for a grand total of 6 hours every year spent thinking about this stuff.
Every year I create a new set of rows that look something like this:
| 2019 |
|---|
| Checking account |
| Savings account |
| Vanguard |
| 401k |
| Acorns |
| Etc... |
| Gross |
| Debts |
| Net |
| Monthly change |
| Cash on hand |
Columns in the spreadsheet represent each month. I use spreadsheet math to add up gross values, subtract debts, and calculate month-to-month fluctuations. Keeping track of cash on hand helps me visualize high-spend months, or signals that I am able to increase my bi-monthly recurring investment.
At the end of the year, I take stock on each of my accounts, decide if I can combine or simplify them, and look at overall yearly growth. My spreadsheet is now 8 years old and is like a master control panel into my financial life. I've found it particularly helpful to drop this data into graphs to help me visualize general trends, identify major life events with spikes and dips, and create trend-lines to help approximate long term trajectory.
I'm not a great budgeter, in that I don't keep rigorous categories of my spending and track them over time, with intricate limits and alerts. But knowing how you're spending money day-to-day is important. My basic version of budgeting is to use my monthly "personal finance day" to review my credit card statements to track general spending patterns and look for services that I paid for but didn't use.
If you're interested in getting started with budgeting tools, I'd recommend Copilot.
When I was young, the commonly-articulated "life journey" of a person was to work from their 20s through their 60s and then...retire. Whatever that means. It turns out, this is just one kind of journey among many possible options. A popular movement called FIRE (Financial Independence/Retire Early) tries to illuminate just how feasible it is for an average person today to retire in their 40s, 30s, or even younger.
I'm not an expert on FIRE, but I'd recommend taking a look at what this movement is about. What has been particularly illuminating to me is putting a dollar number to my retirement goals. FIRE defines this number as 25 times your annual expenses. If you spend $60k per year to live comfortably, you should have $1.5 million saved for retirement.
It's worth taking the time to ball-park your own personal number that represents the amount of money you'd need to live entirely independent of employment by another person.
You don't need to make hundreds of thousands of dollars to start investing. You don't need to pick stocks, research financial statements, and track market movements every hour of your day to be an investor. There is a less stressful way to put your money to work that will put you on a path towards freedom and peace of mind.
Start now. Invest automatically every month. Don't overthink it.
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