Wealth In Hand currently offers 12 different workshops and the most popular ones show statistics that present what’s called the time value of money. (This is a concept that says money is more valuable over time because of its own earning potential). We walk through this concept via two different scenarios.
The first is the value of starting to save as early as possible. The second is the value of taking those savings and investing them as early as possible. After we show you the images we bring up in our workshops, you'll understand why the first question is, “Yea, so I didn’t start that early, now what?”
The Value of Starting Early: Below you will see two “people” who contributed the same dollar amount per week and invested in a portfolio that had the exact same return. The difference? Jennifer started this process 14 years earlier and ultimately contributed $70,000 more over the same time frame as Jimmy.
Another question I usually get after this stat, “Why did you use 7%?” Let’s mention a few things:
7% is a moderately aggressive portfolio as the average rate of return of the US stock market over its history is ~10%* per year. With a 7% annual return assumption that means this portfolio is a bit less risky than the markets.
We should assume that if you have money that isn’t needed for at least 10 years you should have it invested in something moderately aggressive because you have the ability to withstand yearly volatility.
*The average annualized total return for the S&P 500 index over the past 90 years was 9.8%. (Annualized is a fancy way of taking the total return of something like the S&P 500 over X period of time and providing you with the average return per year over that X period). In 2017, the S&P 500's total return was over 19.7%. But for 2018, it was -6.2%. That’s why we look at this as an average and remember the year to year performance can be volatile.
Ok so, first off, have you closed your mouth yet from the jaw-dropping difference you just saw? Big difference in that number right? Imagine what that looks like if you’re contributing $200/week or $500/week… I’ll show you those numbers bit later :)
The Value of Investing: Below you will see two “people” who contributed the same amount over the same time frame. One of these two put that money in a high yield savings account and earned 2.5% per year and one invested it in a moderately aggressive portfolio.
Ok, before anyone gets all up in arms and points out some flaws in these numbers, allow me to do that for you:
Most people don’t contribute the same dollar amount per week (or month) from age 21 until retirement. More likely you start small and increase it.
Most people will use/spend a portion of the money we’ve calculated above before retirement. It is possible you have access to some of these savings before 59.5 and therefore you could have used several hundred thousand to buy a home, pay for repairs, kids college…etc
Growth doesn’t necessarily happen as smoothly as these calculations allow (we are just using a standard weekly contribution and growth rate)
Great, so what you’re saying Magda, is that the information you just showed us is useless because it’s not realistic… NO! Here’s what you should take away from the two stats:
Regardless of how you save, the longer you are saving the better (investing or otherwise)
Of the money you are saving, the more of it you can spare to have invested in higher returns (like the stock market) the better over the long run. (DISCLAIMER: There is risk of loss in investing. As I and any advisor will tell you, the markets are no place for short term cash needs within 3-5 years or less).
So have you hit the shame train yet? I’m hoping you haven’t but I want to talk about the very real shame/regret/anxiety people feel when they are given these numbers. Sometimes, people will avoid reviewing their finances with a professional out of fear they may hear things like this. (Cough cough, ever avoid the doctor so they don’t tell you, “Ugh yea, you tore something in your foot you need to stay off it for 4 months…” If you don’t go you’ll never know…).
Well friends, it shouldn’t work like that. Having someone make you feel stupid or irrational for not investing isn’t right. (I do feel a bit more strongly about those who have the means to save and don’t, that is something everyone should be working on). Investing can be very intimidating and confusing. Without a friend or family member to help walk you through the value and dangers of investing it’s tough to know where to get started. You are not alone.
The response I give to employees that say, “How do I make up for lost time” is, “Well, there’s no better time than now so let’s not delay too much longer!” Why don’t we bring back those numbers I was mentioning earlier. You know, if you wanted to contribute more per week than I had originally shown...
Turns out even if you start later in life, if you also happen to have more income (and maybe a partner who also has an income) hopefully you can contribute more and “catch up”. No, you will never catch up to those who started 14 years earlier, (all things being equal) but do you need to? Don’t let the fear of getting started paralyze you. (If you need help figuring out where/how to dip your toe in investing send me a note or take a look at robo advisors. If you have very little to invest, people also really like Acorns).
I’ll admit, I’m so passionate about finance I do start sweating when I hear people who fear investing. I’m working on it. People can perceive my excitement for investing as shaming. Try not to do that. As advisors, we are just showing the realities of the numbers above but we also want to help. We believe in investing, for the right reasons, so that you don’t have to work as hard to build your wealth. Second only to increasing my salary drastically over the last decade, investing is the reason for my financial success. And no, I didn't do anything fancy. I've only ever sold two positions in my life (until I used one account to purchase our home) and a majority (75%) of my money is in basic index funds.
Understanding what your money could be doing for you is really important. Talking to someone who can show you what’s right for you (and it might not be investing if you have a short term need for the money) will make a big difference for your financial future.
So do us a favor, don’t let investor shaming shape your future. You’re just as smart as the next one. You might just need a refresher on how this whole investing thing works! If it helps, I’ve already made a free video series to walk you through the basics in my Investment Series.
Happy Saving, Investing, and Being Happy About It,