***Photo taken outside The Louvre in Paris***
So you’re probably still in sticker shock from the last post. Again, nobody said this would be easy. That being said, I am about to teach you how to make money while you sleep, sit on the toilet, play video games, or while you work on amassing even more wealth!
Well get out your note pads because investing 101 is about to be in session. So back to the million dollar question. How long would it take you to save 1 million dollars if you managed to stash away 20,000 a year? Well the simple answer is 50 years. I don’t know about you but that is far too long. We need to find some way to speed up the process. We have mojitos to drink…
One way to accelerate the path to your first million is investing. There are tons of different investment options. We will focus on just one for this introduction post. Don’t worry more detailed posts will be coming in the near future.
The first investment option we will cover is stocks. As a reminder this is meant to cover the basics. It would be nearly impossible to cover everything in one post. Think of stocks as you buying ownership in a company. You are now entitled to any growth (or loss) that said company may experience. For example, lets say you buy a single share of WTF stock for 1 dollar. You hold it for one year and it is now worth 2 dollars due WTF’s growth in the market. Congrats, you just doubled your investment! If you would have invested $1,000 it would now be $2,000. $10,000 would have turned into $20,000. $100,000 would be $200,000. I think you’re getting the picture.
Unfortunately, that kind of one year return is not common nor would it come without a ton of risk! Remember our goal is to make money in the long (key word) term. Well what is a more realistic return for your investment? Well that is determined based on your stocks and allocation. For now, we will work with a “conservative” 7% annual return after we account for inflation (more on that in future posts).
So now your hypothetical 1 dollar share of WTF stock only makes you 7 cents a year. That may not sound like a lot but keep reading. Instead of buying 1 share lets buy 20,000. Lets see how much $20,000 of WTF stock could be worth using some more simple math.
*insert number crunching sounds here*
$20,000 would generate $1,400 every year assuming the same 7% return, not too bad. That’s ~$116 a month, $3.84 a day, or 16 cents every hour (even while you sleep)!
Now lets assume you don’t sell the stock to capture the $1,400 (before tax) earnings after your first year. Instead, you decide to keep it invested in WTF over the long term. Lets see what your $20,000 could be worth in the future.
- Your $20,000 investment after 5 years is now worth ~$28,000!!!
- If you hold it 10 years, ~$39,000
- 15 years, ~$55,000 (congrats, you have doubled your money!!!)
- 25 years, ~$109,000
- At 50 years you have a whopping $589,141!!!
You have to LOVE the power of compounding. Again this $589,000 is all from one single investment. Oh and $589,000 would generate $41,230 a year assuming the same 7% return as above. That’s $3,436 a month, $113 a day, or $4.70 every hour!
Lets see how long it would take to hit the magic 1 MILLION dollars assuming we INVESTED $20,000 a year. I will do the calculations for you. Just sit back, relax, and prepare to be amazed! Note, we are working with the same assumptions above. We are not selling any shares of our WTF stock and are expecting a 7% annual return after inflation.
- $20,000 a year, for 15 years, would put us at $537,761!!!
- 20 years would put us at $877,304!!!
- 25 years would put us at $1,353,529!!!
So as you can see we have literally cut the journey to your first MILLION dollars in half! That $1,353,529 would generate $94,747 a year, which is $7,896 a month, $260 a day, or $10.83 EVERY hour!!! I don’t know about you but I love making money in my sleep.
Now you probably have two burning questions. How do I pull money out of my investment without depleting all of my capital (your $1,353,529)? Good question, the answer is the “4% Rule” which we will cover in upcoming posts. The other question may be how in the world do you save $20,000 a year?!? Well go to the next post and find out how to start! You may also be like me and think that 25 years is still too long to wait. Don’t worry we have you covered there as well.
Here is another formula for you. Take some time to play around with it!
Future value = present value * ((1 + estimated return)^time)
Example $21,400 = $20,000 * ((1+.07)^1)