This post is part of an ongoing series. If you haven’t already, also check out my last post: Stop trying to time the market.
Before we get into the specifics of how to invest to optimize the chance of building the largest fund for your future self, let’s talk about why it is so important for everyone to invest.
Do you love your job?
If the answer is “no”, then absolutely, you should invest. It’s the most sure way of building yourself the financial freedom to turn “work” from something you do to pay the bills and are stuck with for the rest of your life, into something that you do because you want to, when you want to.
If the answer is “yes”, first, pat yourself on the back. You must have worked diligently to get to do the work of your dreams. Well, my suggestion to you is, still, you should invest!
With the rapid rate of change in technology, the nature of work is quickly shifting. In my industry, I often feel overwhelmed by all of the new technologies I must continue to learn to keep pace, and as much as I love my job right now, there is no guarantee that the opportunities for me to continue to do the jobs that I love will always be there. Sometime in the near future, I may want to take a few years off to study. Or maybe I might decide to step away from engineering and become a doctor, a barista, a concert pianist, a carpenter, or take your pick! Maybe I’ll retire early and start a farm in a remote village. Or maybe I’ll be married, and my future wife and I decide to be stay-at-home parents. Whatever my desires happen to be, the only reason I will have these options in life is because I was taught about the importance of investing very early on. When I was a kid, my dad set up a meeting for me to meet and talk to his financial advisor (one of the greatest gifts, thank you dad). Ever since, I have been investing a portion of every one of my paychecks, even if I was working a minimum wage job (in 2004 California, that meant $6.75/hour, or $54/day, which felt like a lot of money for me back then). It was also around the time that my dad left his corporate job to pursue his goal of becoming a pastor. It was the perfect living example, to the eyes of my high-school self, that making wise financial decisions throughout your life can set you up with the freedom to pursue your passions. Again, thank you dad for the awesome life-lesson. Anyway the good news for you is, you actually don’t need a financial advisor. Investing is super easy, and I will show you how.
But first, why should you invest? It is because of the single greatest thing money buys you, which is freedom. Money allows you to live the way you want to live. It frees you from having to please your boss or to keep jobs that you hate. It frees you from the worries of losing your job one day. It allows you to give freely to charities whose causes align with your core values, or even better, quit your current job and go work with those organizations to make a difference in the world with your own hands. It allows you to work when you want to, and spend the rest of the time with your loved ones. It lets you travel the world, and should you fall in love with a place, it gives you the ability to stay there indefinitely instead of flying back. As you build your investments and slowly remove the burdens that come from your day-to-day finances, you gain the power to focus more of your life and energy on what truly matters to you.
Investing is not just for the rich. Everybody should invest. It does not matter what you do or how much money you make. Each time you get that paycheck, you have to make investing a priority before you go out for the celebratory dinner or buy yourself a nice gift.
I’m not saying you shouldn’t spend. But if you do decide to spend your money, do it with thought, and ensure that every spending decision you make is an intentional one, with a clear purpose. Just consider that throughout its history, the S&P 500 index has yielded investors an average of 11.95% annual return. With the dividend and capital gains re-invested earning compound interest, that means a $10 you invested forty years ago will be worth $914 today. Once you come to the understanding that the $10 you spend today is depriving your future self of $914 and you are ok with that, then go ahead, spend away that $10. If not, think twice before every purchase you make. That $3 latte to keep yourself awake? That’s actually a $274 cup of latte. Maybe you should just go to bed earlier so you don’t need coffee to wake you up. The nice $60 sushi dinner? That’s actually costing you $5484. Maybe you should just cook up something at home instead. The $500 weekend trip to a resort? That’s $45701, you can easily live two years off that! Maybe you can skip the trip this time and go out for an inexpensive fun night in your own neighborhood instead.
Next: What is an index fund?