How to make your money go further instantly
To make your money go farther you have to look at your
spending through the eyes of an investor. Imagine for a minute that you have some extra money. You decide it’s time to start investing. You stroll down to your local investment company, and you ask for Teddy the trader.
Teddy has an incredible knack for putting you in the right index funds. All he needs is a little more information before he can select the perfect investment for you. “How do you feel about risk?” he inquires. “Do love it? Hate it? What if your investment lost 50% of its value? Could you still sleep at night? Could you hold the position with no guarantee that it’s going to come back?”
You start to get a little queasy. You thought Teddy the trader was the best of the best! You worked hard for your money. You don’t want it to turn to Wall Street dust. At the same time, you find yourself looking Teddy square in the eye and tell him you would like to be very aggressive.
“Wonderful! We will put you in 100% equities (stocks). You can hope to earn a compounded rate of return of 8% over the long run.”
Fast forward a couple of years and your investments are going great! Teddy delivered! Your sexy equity index funds are producing that fabulous rate of return Teddy talked about. For every dollar you invested, one year later, you earned $.08. Yippie! ( You actually earned $0.068 after you pay the 15% tax. If you factor in inflation you now are around $.05. And this is considered a very good rate of return!*)
For me, this is where the disconnect happens. I see people getting excited about investing, but the thought of not spending $.05 never enters their conscious mind. This is where the untapped fortune lies. The rate of return is insanely higher, risk-free, and tax-free. Let me demystify.
If $.05 is something to get excited about in investing, and investing is something you do to create wealth, it’s the nickels and dimes that create the fortune. Which means, there is no small money!
To clarify, this is not about living a rice and beans lifestyle. You can still have whatever it is that you want to have. If you want to make your money go further and your fortune to grow faster, the solution is to become more aware of the price. I’m not talking about becoming a “penny pincher” or chasing every sale. (Sales make you broke.) Here’s an everyday example.
Imagine you have a cough. You feel like you’re dying! You need cough syrup like the desert needs rain. Richie Rich is in the exact same position. Both of you drag your tired booty to the corner store to buy cough syrup. You both walk to the cough syrup aisle with Nyquil on your mind.
You spot the Nyquil and scoop it up. Mission accomplished. You might have seen the store brand. You might have not. If you did, this is a common thought process. “It’s only a $4.00 difference. I’m going to go with what I know.”
Richie Rich finds the Nyquil, and sitting right next to it is the store brand. He’s not trying to save money, but it’s a habit to pause and look at the prices. The store brand pops out immediately. It’s $4.00 dollars less! That’s crazy! He knows that it’s not 50% less effective. It’s that Nyquil is so damn popular that the only way the store brand can compete is to make the price very attractive. Richie Rich gives some silent applause to Nyquil, and he buys the store brand.
Now let’s see why Richie Rich got so excited. He got a risk-free 53%* rate of return. That’s over 8 times the return he could hope to get in the market. There is no inflation or tax drag. To top it off, because this is a habit, he has enough money to invest monthly, potentially increasing his return.
On the flip side, if you want investments alone to create your fortune, to earn the same $4.00 you would have to come up with $80 to invest. Take an aggressive risk for the chance of earning an 8% return. Pay taxes, and account for the cost of inflation, which is historically 3%. *
It’s important to note that Richie Rich is not sacrificing anything. He compares prices, but price is not why he buys. Taking the example above, he is buying cough syrup that he thinks will get rid of his cough. The savings is a bonus.
Do you see how this habit could really make your investments add up?
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*Let me know if you want to see how this is calculated