Need for Investing
Investing is just taking money and stashing it away for your future self. It is sacrificing what you want or could have so that you can have more at a later time. Now if we all had perfect immortal bodies that would never get sick or tired there would not be nearly as much need to invest. One could simply work right up until they died paying all their bills and living paycheck to paycheck maximizing their income. But life is messy and unexpected bills come up and we have mortal bodies that get old and break down. Saving for a rainy day is not just a good idea, it's a necessity.
Investing Early
As I talked about in my post Credit Cards, there is compound interest which means the earlier to begin investing the easier it will be to save for retirement as even a little bit of money invested over a long time can grow exponentially (See also 6% + 6% ≠ 12%). Time is on your side and it can be a huge ally in wealth building. They say money tends to double every 10 years, so if you started investing in your twenties vs your thirties you would have gotten an additional opportunity to double your money. For example you somehow were able to put away $20,000 at 24 you would be looking at $40,000 at 34 giving you a free $20,000 to help you hit your retirement goal.
Retirement Goal
Just going off of other popular financial advice they say you should, “Aim to save at least 1x your salary by 30, 3x by 40, 6x by 50, 8x by 60, and 10x by 67” For example say you make $60,000.
This will obviously change if your income changes or if you find a partner which will increase your household income but it's a great measure to see how you are doing and if you need to modify your lifestyle.
How much to Save
Experts recommend saving 15% of your take home wage each month. For example, say you make $2,000 per month, you should save $300 per month. Paying off debt should take priority over saving but you should be paying at least $300 per month to pay off debt. Budgeting is critical to saving as it's impossible to save 15% without knowing how much money you are bringing in each month.
If you were to invest $300 per month from the age of 30 to 65 and were getting 8% return you would have:
End Balance $642,770.27 Total Contributions $126,000.00 Total Interest $516,770.27
The average stock market return is about 10% per year for nearly the last century, as measured by the S&P 500 index which makes 8% somewhat conservative. There will be years of less growth (2008 financial crisis) and years of high grows (2023).
Automate Investing
The best way to invest is to automate it so you don’t have to think about investing. You should pay yourself first before you get to your other purchase and expenses. Lots of banks and investments apps have easy to use automated investing to a mutual fund or ETF (exchange traded fund) or your favorite stocks. It will feel like a bill and leave you with only the money left for your wants so you won’t over spend. You can also add a investment bill anytime or cancel it if you are needing to save up for a large purchase.
Types of Investments
Mutual fund -Type of investment vehicle where the money collected from various investors is pooled together to invest in different assets including bonds, stocks, and/or money market investments. There is a management fee associated with these, around 0.5%.
Stocks - Are a share in the ownership of a company. Stock represents a claim on the company's assets and earnings. As you acquire more stock, your ownership stake in the company becomes greater. Whether you say shares, equity, or stock, it all means the same thing. It makes you a part owner in the company and staked into the success of the business. Stocks also give dividends which is a portion of the company’s profit paid out to each of the shareholders or those who have purchased stock in the company.
Bonds - Are issued by governments and corporations when they want to raise money. Buying a bond, you're giving the issuer a loan, and they agree to pay you back the face value of the loan on a specific date, and to pay you periodic interest payments along the way, usually twice a year. The government or corporation is in debt to you which makes it a very safe investment.
ETFs - An exchange traded fund, or ETF, is a basket of investments like stocks or bonds. Exchange traded funds let you invest in lots of securities all at once lowering the risk of buying individual stocks.
GIC - A guaranteed investment certificate (GIC) is an investment sold by Canadian financial institutions. When buying a GIC, investors deposit money in the bank for a fixed length of time, receiving interest on that money and the principal when the investment matures. Like the name implies there is a guarantee that you will get your money back in full plus interest which is pre determined when purchased. GICs are extremely safe.
Real Estate - Is a great investment when you are renting as it can eliminate your need to pay rent which is a large portion of one's Needs or cost of existence. If you are paying $1200 for rent you keep $0 per month. But if you pay $1200 for a mortgage you will keep a portion of your payment roughly $360. At the beginning of a mortgage, 31% of your money starts to go toward the principal. You see 45% going toward principal after ten years and 67% going toward principal after year 20. It isn’t much but it goes toward building your wealth and is an additional stream of savings. If you buy additional homes you can rent them out to gain rental income and build wealth due to the rising equity or value of the house over time. Houses historically go up approximately 2% per year even though lately they have gone up quite significantly, with Calgary going up 10% last year.
What to Invest in
There are many different things to invest in from stock, bonds, ETFs, GIC (Guaranteed Investment Certificates) mutual funds, even real estate. What to pick depends on your risk tolerance. High risk can lead to big returns but also big losses. If you are a beginner I would recommend mutual funds due to their ease of use. ETF are also a great alternative due to the medium return and medium risk.
You don’t need to be an expert to invest. It just starts with simply saving or better yet automating your investment in something you are comfortable with the risk. Each year putting off investing is a year missed out on potential gains and earnings. Companies industries are making money and investing allows you to hitch your wagon to their success.
If you found this helpful and would like help budgeting or investing please email me at TaylorMckeeCoaching@gmail.com
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