The secret the rich don't want you to know - the boring investment that will make you super wealthy.
It’s been a little over a year since I wrote my first blog. A lot has happened in that time. We have a new president, life is returning to a level of normalcy, and you have started investing. Right? Please tell me you have been reading the blogs and learning from our Instagram.
No, you didn't listen? Ok I understand. You have a lot going on. You think investing is risky and you don't want to lose your hard earned money. I get it. I've heard those excuses more times than I can count, but it's time to change that mindset.
The real risk is not investing.
I'm serious - hear me out. Inflation is up 7% year over year. That's overall, here's a look at different
areas being affected by inflation:
Your money is losing value every day.
Let's say you put $1,000 in a savings account one year ago today. With banks providing 0.04% interest on your money, you would have $1,000.40 in your savings account. In purchasing power, that money is really only worth $930.37 compared to last year.
You are actually losing money keeping your dollars in a saving account!
I know! I know! It counteracts everything we were taught growing up. We were taught we needed to save money for safety and to build wealth. But that's opposite of the truth. Wealth is not built by saving, wealth is built by investing.
Here is a graphic that shows the difference between saving and investing over the course of 30 years, using only 2% inflation as the basis:
The answer is clear, you need to invest.
We recommend index funds for starters. An index fund is a portfolio of stocks or bonds designed to mimic the composition and performance of a financial market index, such as the S&P 500. By matching the return of the market, index funds tend to outperform any single investment over the long term.
Not to mention, if you invest in the S&P 500 over the course of 20 years, you have a nearly 0% chance of losing money. You are guaranteed to lose money due to inflation. I reiterate my point from above - not investing is the real risk!
Investing in an index fund may not sound fun and exciting. It's not. Not at all. But it works. I know everyone wants to get rich quick, but it's not realistic. Gaining wealth is a long term game.
Don't believe me? Think you're smarter than the entire market? Let's look at the most popular stocks and see how you would have done if you invested $1,000 on January 31, 2021:
Out of the 11 individual stocks, only 4 would have had better returns than Vanguard's S&P 500 index fund - Apple, Google, Procter & Gamble and Target. Six would have lost you money.
Clearly, it’s a crap shoot when choosing an individual name. You may think a company deserves to go up in price, but the market may disagree. It's too much work to pick winning stocks; the research, the earnings reports, the breaking news. Unless you do this full time, it's too much to focus on.
For this reason, I strongly recommend index funds to investors just starting out. You cannot predict the short term movement in individual stocks, but you can rely on the market long term to consistently rise 8-10% every year.
As John Bogle says, "why try to find the needle in the haystack when you can buy the entire haystack?" With the S&P 500, you are buying a piece of over 500 different stocks.
Dollar cost average into the S&P 500, sit back and relax. Or as I like to say, DCA and chill:
I know you want to be rich now, but if you make the smart investment and employ a bit of patience, you can have substantial wealth in the future.
But they key is to start as soon as possible. Let's take a look at what happens if you wait to start investing until you're "ready". Sam starts investing at 25, Laura starts investing at 35 and Brian waits until he is 45:
Waiting 10 years make a huge difference in investing. Waiting 20 years could affect your ability to retire. Start today and DCA a little bit every month.
Why dollar cost average? Glad you asked. Many people let emotions get in the way of investing. It's natural. We see the market going down and we don't want to lose money. We see the market at all time highs and think we should wait for the market to pull back before we put our money in.
Emotions can cause us to miss out on significant returns.
Lets use Sam, Laura and Brian again. This time Sam tries to time the market and has the worst luck. He invests the day before a market crash every time. Laura also times the market but has the best luck, investing at the bottom of every market crash. Brian keeps it simple and dollar cost averages every single month:
Brian's strategy is the clear winner. Time in the market is better than trying to time the market. Remove the emotions and dollar cost average.
Now you know the secret. Budget and invest consistently in index funds. Be patient and you will not regret it!
So, did I get you excited this time? Do you realize investing is the greatest possible chance for attaining wealth? I hope so, because I want everyone to have the opportunity to build wealth.
If you're ready, every great financial plan starts with a budget. You should be tracking your income and expenses on a monthly basis. Most people have a rough idea of these numbers and as long as there is money in their bank account, they don't really pay attention to their spending.
My first piece of advice; track every dime you spend. That may seem unrealistic, but knowing where your money is going will allow you to curb unnecessary spending, meet your budget goals and determine how much you are able to invest.
Not sure how to make a budget? I have you covered! For a limited time, sign up for our newsletter and I'll send a copy of our budget spreadsheet absolutely free.
Here's a look at the sheet with sample budget used:
If you prefer technology, we've also partnered with several great financial companies for budgeting and investing. See the partnerships below.
Thank you for reading! Be sure to follow us on Instagram for free daily content.
These are the companies we have partnered with this year. They make this blog possible so go check them out!
Coinbase - cryptocurrency exchange - get $10 in free Bitcoin when you buy your first $100
BlockFi - cryptocurrency exchange - get up to 8.6% interest on your crypto
Personal Capital - personal finance platform that helps users take control of their finances by blending world-class technology with human advice. Pair industry-leading financial tools with licensed advisors and full-service planning experts across all 50 states
M1 Finance - the future of finance in a sleek, modern app. Rated #1 for Sophisticated Investors by Investopedia, users can enjoy: free investing, high yield checking, low rate borrowing, automation, and optimization
TrueBill - app that helps people gain awareness about their spending habits and better manage their money. Truebill makes it easier than ever to manage subscriptions, lower your bills, and stay on top of finances & budgeting
Canva - design software that makes design simple, convenient, and reliable. Create what you need in no time! Jam-packed with time-saving tools that make anyone look like a professional designer
Credit Karma - your credit scores should be free. And now they are. Check your scores anytime, anywhere and never pay for it. Save smart with Credit Karma.
Beagle - helps you find your old 401(k)s. Also helps you rollover & consolidate your 401(k)s in to a Beagle account, which gives you access to your retirement money early with no tax or penalties.
I am not a licensed financial advisor or financial professional. This is not investing advice. I am simply sharing my research and opinion based on that research. It is very important that you do your own research and make investments based on your own personal circumstances, preferences, goals and risk tolerance.
This blog contains some affiliate links. If you purchase any service through one of these links, I may earn a small commission at no extra cost to you.