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Many people reach out to me and say something along these lines; “Nick, I only have a couple hundred (Or thousand) dollars saved up is that enough to start investing?” And I will answer emphatically, “YES!” There is no better time like the present to start putting your money to work no matter what age you are! In this article I’m going to explain:

  • Power of Compounding
  • Importance of Saving
  • Reaching Financial Freedom

Compounding

A great example I like to use to show what compounding means is sports betting. Let’s imagine you and a friend decide that you are going to bet every weekend on one NFL football game during the season. You guys decide that you are going to start with .20cents the first week for the bet and then double it each week further. So week 1 would be .20cents, week two would be .40cents, week three would be .80cents and so on. Doesn’t sound like a whole lot of money will be at stake right? Well take a look at the table below as we get all the way through the season.

Week: Bet $
1 .20
2 .40
3 .80
4 1.60
5 3.20
6 6.40
7 12.80
8 25.60
9 51.20
10 102.40
11 204.80
12 409.60
13 819.20
14 1638.40
15 3276.80
16 6553.60

bucs

So as you can see in week 16 you would be betting over six grand! Holy hell, better not pick the Buccaneers to pull it out. (Long time disappointed fan speaking) Remember this all started with a .20cent bet! This is the power of compounding and it can work just the same for you in your investments.

The Rule of 72

The rule of 72 states that it will take 72 years to double your money at a compound rate of 1% annually. This means that if you invested $4,000 dollars today at a rate of return at 1% it would take 72 years for it to become $8,000. If your saying to yourself, “I ain’t got no time for that”, then don’t worry. 1% rate of return in the stock market is very poor. I believe that in a moderately aggressive approach you can expect to see returns of 8-10% on your investments each year. Remember building wealth is a marathon not a sprint! I’m not here to give you unrealistic expectations or present some get-rich-quick scheme to you. As you will see shortly we can all be rich over time with the power of saving and compounding. Using the rule of 72, let’s look at the chart below to see how many years it would take to double your investment at certain rates of return.

Rate of Return:

Years to Double Money

1% 72
2% 36
3% 24
4% 18
5% 14.4
6% 12
7% 10.2
8% 9
9% 8
10% 7.2
11% 6.5
12% 6
13% 5.5
14% 5.1
15% 4.8
16% 4.5
17% 4.2
18% 4
19% 3.8
20% 3.6
25% 2.88

marathon

I titled this article “how to turn $5,000 into $40,000”. For this example, I’m using an expected annualized rate of return of 10%. So it would take roughly 30years for this initial investment to become $40,000. Now you might be thinking that this seems like a long time. What you have to realize is that you did not put any more money into this investment! This is just 5k that grew and compounded while you slept. Imagine if you kept adding to that portion of money over the years! This brings me to my next topic which is the importance of saving.

Small Savings Can Go a Long Way

Growing up I used to have this big plastic Coca-Cola bottle that I would put loose change into from time to time. I did this for a period of a couple of years till it was full. Looking at it you wouldn’t think it was much but when I cashed it out it ended up being over $600 in coins. It ultimately helped me put the down-payment on my first car. Saving can be huge, especially when you put those savings to work in the stock market. Interest rates are extremely low right now in the United States. If you were to open a savings account at a bank, I would be shocked if you got more than 2% interest on that money you put in. That’s why it’s important to understand the investment options at your disposable to properly put that money to work. Saving a little on a daily, weekly, or monthly basis can turn out to be huge profits for you down the line. Take a look at the table below to see what I mean.

 

The earlier you start saving the bigger your returns! (Assumes 10% return annually)

Daily Savings Monthly Savings 10 Years 20 years 30 years 40 years 50 years
$5 $150 $30,727 $113,905 $339,073 $948,612 $2,598,659
$10 $300 $61,453 $227,811 $678,146 $1,897,224 $5,197,317
$15 $450 $92,180 $341,716 $1,017,220 $2,845,836 $7,795,976
$20 $600 $122,907 $455,621 $1,356,293 $3,794,448 $10,394,634
$30 $900 $184,360 $683,432 $2,034,439 $5,691,672 $15,591,952
$40 $1,200 $245,814 $911,243 $2,712,586 $7,588,895 $20,789,269

 

I think this table incredible. I mean are you saying if I save just $5 dollars a day it could be $113,905 in just 20 years?? That’s $36,000 of my own money during that time ($150x12monthsx20years) but my end payout is $77,905 more!! I didn’t have to work for that, my investments did the work for me! Most people spend $5 a day at Starbucks. I think they would be kicking themselves if they knew that money could have been $113,905 in the future. Not to mention that you could be a millionaire in just 30 years from saving $15 a day. I’m 24 which means I could be a millionaire at age 54 just from those savings alone. Drinks on me!

You also have to realize this is just money you are building through the stock market. This doesn’t not include the income you are making through what you do for a living and it does not include retirement plans you may be a part of such as a 401k. This power of compounding is for your long-term approach to building wealth. Short-term income strategies are separate and will be something I discuss in other articles.

Now I totally understand that not everyone will be able to save this kind of money. Between student loans and monthly expenses; sometimes it’s hard just to keep up. My point is to start small, saving little at a time to put towards your future. If it’s a dollar a day, great! If it’s $5 a month, awesome! The goal is to get into a routine of putting money aside no matter what the amount. Cut expenses where you can even if that means not buying a couple mocha skinny cappuccino triple shot expresso pumpkin spice lattes this month.  Many times these expenses come from things that are not actually good for our overall health anyway, like caffeine addictions…and being basic. (Yes that’s you, pumpkin spice lovers.)

basci

Achieving Financial Freedom

What does it mean to be financially free to you? Does it mean being able to pay your bills every month? Does it mean having saved up enough money to cover expenses for a year? Does it mean paying off all your debt? Or perhaps being able to retire at a young age? Maybe financial freedom for you is being able to travel the world without a worrying about your money. I would strongly consider taking a moment to think about this and find an answer for yourself. Many times society puts us under this illusion that we need millions of dollars to be happy or get to do the things in life that we want. I’m here to tell you that is not the case. For most people, their goals and financial “dreams” are right within their reach. If you take the time to think about your financial goals in life and actually put a dollar figure next to them, I know for most of you it will be less than what you expected. With that number you can create a financial plan for your life that will meet all of those goals.  For years my thinking when it came to money was, “I’m going to try to make as much money as I can possible. Millions.” This thinking is way too broad and clouds what you can accomplish if you actually set goals and have a path to reach those goals. So start making a plan today!

travel

My hope is that this article will get people investing today. 3/4 Americans say that they have financial worries but only 40% of those people say that they have some kind of investment plan. When you are young, your time horizon is soooo huge to build wealth! Look again at the saving table, $5 a day could be almost a million in 40 years. I know, we’re millennials, we want instant gratification but trust me when I say your future self will be thanking you!  For my older generations, it’s not too late to get into the game. Even if you are 40 or 50 you still have lots of time for money to grow and trust me when I say that you are few investment vehicles out there besides real estate and stocks that give you more than 2% return.

If this article got you excited to learn more, continue to follow my blog to learn how to get started and how to mitigate risk. I can’t express the importance of taking the time to learn this information. I KNOW it can change your life.

“The journey of 1,000 miles begins with the first step” -Lao Tzu

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