Give Yourself a RAISE! Make your Money Work!
Updated: Feb 22, 2019
Is your money sitting around not helping you achieve your financial goals? Mine was, until I shifted my paradigm (and learned how to invest correctly), because I was afraid, and I hadn't figured out the math. In this post, I'll walk you through my thought process and crunch some numbers to show you how you can stop leaving money on the table and make it do your bidding!
I've always been a pretty good saver. Not the best, but every year I've saved a good chunk of my salary (except when I lived in Nashville, but that's a story for a different day). I'm detailing this year of savings here, if you want to follow along.
Sadly, for the first 10 years of my career, I didn't know how to invest. Oh, I tried to learn, I read a lot about picking stocks and reading charts and all that, but like most people, when I invested, I didn't do it well, and the stocks I picked didn't do anything but deflate like an old balloon. I hadn't heard of index fund investing, and it was years until I would meet up with Andrew Hallam, whose talk totally changed my life. I made pretty much every investing mistake you can make, so for the three years I was invested, I just lost money. Fortunately not a lot, because I knew what I was doing wasn't working so I kept most of my money in my checking account, just sitting there, losing to inflation (which I also didn't understand).
Right before I heard Andrew Hallam talk and first heard of index fund investing, I had actually pulled all my money out of the stock market, convinced that Trump's election would break the whole system and we would be trading carpentry skills for home made buckets of butter and living without electricity immediately upon his inauguration. So at that point, ALL my money was doing nothing.
Then I learned about index fund investing and tried it. It worked. The fact that the market was in a roaring bull period didn't hurt. But I was only sticking my toes in the water. I was keeping the vast majority of my money out of my investments, and I wasn't even sure how much I should have in the investments either.
At the same time, I wanted to generate more income, so I could see my net worth climb faster, but I didn't like any of the options for passive income, and I didn't want to tutor, so I felt a bit stuck.
Then the light bulb went on! If I had a year's worth of salary in my investments instead of my checking account, on average, it would be like getting a 6%-10% raise. So If I was making $40,000 in my job, but had that in my investments, I would get between $2400 and $4000 extra dollars in my net worth without doing ANYTHING! FREE MONEY!!!!
And then I thought about it some more, and realized it was even better than that, because of compounding interest! That money I gained the first year would then be added to the principle and IT would have 6%-10% added to it, and so on and so on. And the more money I put into the investments, the larger the effect would be. When I worked it out, being that I'm probably at least 15 years from retirement, I was giving up HUGE amounts of money by not having more in my investments instead of my checking account. Here's a table for detail at various rates of return.
In 15 years, at 7% I would be missing out on over $110,000, if I got 9% it would by over $145,000. And that's if I never added any other savings to the account to also gain money.
This was the answer I was looking for. Once I figured this out, I learned that I should only keep out 4-6 months of money in checking and invest the rest, and that was easy to figure out because I use a spending tracking app (It's called "Spending", oh so original).
Since then, I've been able to get the proper amount in my investments and am seeing the numbers I talked about. Now, I'm still relatively early into this, I would say it's just now that I've finally gotten my asset allocation correct. The market could collapse tomorrow and I wouldn't get that raise for a while. But the math is pretty clear, if I give it a long enough time, and don't freak out and lock in my savings, index funds will give me a raise, and all I had to do was shift the money from one account to index funds.
I hope this helped you understand how I came to think about where my money was, and how to make it work hard for me. Please subscribe to the blog and comment below if you like what I'm doing or hate it or think I made a mistake I should fix. I am very happy to have people disagree with me!
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