Brad Wardell's views about technology, politics, religion, world affairs, and all sorts of politically incorrect topics.
Understanding money and investment
Published on March 4, 2007 By Draginol In Business

I haven't ever read one of those "get rich" books. But I suspect that any reputable one would have a graph or chart or something that looks something like the above.

The difference between wealthy people and non-wealthy people is the above. Wealthy people build assets, non-wealthy-people don't.  If you're not using your company's 401K plan or investing in your IRA, then you won't ever be wealthy.  If your excuse is "I can't afford to invest" then you are choosing to never be wealthy (or you don't have very strong math skills or both).

What inspired me to write this was that I saw people on suggesting that wealthy people are just the people who work really hard year after year missing out on a lifetime of experience "life".  I've seen this portrayed on television and in movies as well. "Wealthy people" are really just workaholics who waste their lives greedily trying to get money and missing out on the lives of their children, neglecting their spouses and ultimately regretting not "stopping and smelling the roses".  That is a description of a workaholic but has nothing to do with wealthy people other than the reality that workaholics are more likely to be wealthy.

In reality, wealthy people build assets and let the income from those assets compound year after year.  Let's say, for instance I save $20 a week. That's a pretty trivial amount. If 20 bucks is the difference between you eating or not then it's probably time to re-evaluate your spending priorities.  In 10 years you'll have amassed $16,000. At 20 years it'll be worth over $50,000.

How we normal people can be "wealthy"

So let's work this out in real life.  If you start at the age of 25 saving $20 each week, then by the time you hit 65 you will have $305,000. And that's assuming a return of only 8% each year.  And most investors expect at least a 10% return over long term. The average "diversified stock portfolio" has averaged a 12.9% in the past few decades. So an 8% return would be a pretty conservative return.

Now, imagine if you can manage to save on average $200 per week instead of $20. That's quite a bit for most people I concede. That's around $10,000 per year in investment.  But if you can manage to do that, now you have over $3 million saved up by the time you're 65. 

With the current tax code, you can put in up to $4,000 per year into an IRA and it's tax deductible. Your spouse can do the same thing. That's up to $8,000 per year -- pretty close to the multi-millionaire result (around $2.5 million by the time you retire).

Early retirement for "the rich"

But what if you want to retire "young". Say you want to retire at 45 or 55?  Look at the chart above. What you have to do is build up your assets so that they return as much as annual income as your job does.

For our example, let's say that Bob and Sally are 35 years old. Between the two of them, they have an annual income of $120,000 and decide they want to retire at 55. They've already saved $50,000 between the two of them in IRAs and 401Ks (which is actually not very impressive -- less than $5k per year since they were 21).

When they hit 55, they will have over $1.2 million assuming a decent return.

Some personal thoughts on investment

I've always been a statistics nut. My friends have seen me graph and measure all kinds of weird things. So it wouldn't surprise them that I always saved the maximum into any IRA or 401K.  While I have a successful company today, it wasn't that way for a long while. My average personal yearly income lagged behind that of my friends until a few years ago.  That is, from 1993 (when I incorporated my company) to nearly 2003, my accumulated personal income was less than that of most of my friends.  But despite that, I had always maxed my IRAs, invested as much as I could either in the company or in stocks.

But most people don't invest their income. They go to work, come home and after they've paid their house payment, car payment, grocery bill, etc. They then go out to eat or buy DVDs or some other consumable that they could have invested. And what they don't realize is that it takes a very small amount of investment to generate huge returns over time.

My investments have averaged around 11% since I started investing back in 1994 (not counting my company). Even had I invested just $5,000 per year back then and stayed at that level forever, I'd have millions when I hit 65. 

But most people won't do that. I've talked to friends and acquaintances and it never ceases to amaze me how much money people will piss away eating out (seriously, I've known people who make less than $35k per year who still spend $100 per week eating out each week).  The beauty with investments is that if you are willing to aggressively invest early on, your compounding returns will soon be so much more that you'll be able to "live it up" long before you retire.

Investment isn't about squirreling away your nuts as you toil in a job for the day of retirement. Investment is about building assets. And having those assets generating income in various forms that eventually far exceeds what your job could bring in.  That 21 year old saving $5,000 per year would have $76,000 10 year years. That's $26,000 back. They'd have $250,000 on their 41st birthday (despite only putting in $100,000 -- they'd have gotten more than twice as much back). You could throw one heck of a party or go on some pretty lavish vacations as you neared your 20 year reunion without putting a real dent into your retirement.

So don't squander your chance to be financially independent. Being "wealthy" is just a matter of having some sense of delayed gratification. Max out your IRAs and 401Ks and the rest will tend to itself.

Comments (Page 1)
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on Mar 04, 2007

Interesting stats, Brad. The thing I think people miss is starting small. We're working on that ourselves, as we'd like the latest truck purchase to be our last big ticket debt item. We're pretty close to the $20/week mark right now as a starting figure, but as you mentioned, it adds up. Heck, in a year's time it'll be $1K, and even at that level the money it starts earning for itself starts to be noticable.

on Mar 04, 2007

I have the company do the same thing. Even what I invest back into the company, I then have the company put all its funds into CDs and such. When our game, GalCiv II did so well generating a lot of income, I took that income and rather than buying frivelous things kept it in the company and what we didn't invest in new hires, ew put into money markets and CDs. 

We did a thing with our bank where we put $400,000 (the company, not me) into a CD at 5.5% annual interest. When it came due, we had $400,000 plus another around $25,000 extra from the investment. And that's just one year.

But to your point, yea, even a trivial amount like 20 bucks a week adds up. The compounding takes off.

on Mar 04, 2007

There's a fun little calculator. Let's say I found a continual CD that returns just 5.5% annual return that I put $100 in per month. Which is pretty much a pathetic level of savings that anyone should be able to do.

10 years later, you've got over $18,000. At 20 years it's almost $50,000. At 30 it's nearly $100,000.  And this isn't investing smartly. This is just throwing 25 bucks a week into a CD at your local bank. Hardly anyone even does this little.

And at our company, the company matches 401K contributions 100% up to 3% of their income.

on Mar 04, 2007

I couldn't agree more. I wish the Army had had a 401K plan or even an IRA option when I joined. Now they do have an IRA-type benefit but hardly any soldiers use it. I actually wrote an article a while back about how the government could save a ton of cash by replacing the current military pension plans with 401k's.


My current company does offer a fair 401k plan and I an investing heavily to make up for time spent being stupid. Suprisingly almost none of the people at work invest in it. They just don't get the math (even in a "nerd" career field).

on Mar 05, 2007
Hey Brad..

When we went home to Minnesota for Christmas, Ryan and I went to talk to the financial planner at our bank about starting an IRA or SOME sort of thing for our retirement. We have lots of debt, which we are slowly but SURELY paying off (one of the medicall bills AND the wedding gets paid off this month. Yippee!). He said we shouldn't even think about starting an IRA until we have like 3 months of income into a savings account, which would take us YEARS. Combined, now, we make about $70K a year (pathetic to the rest of you, I know), so that's what...$20K that we would need just in a savings account in case one of us got sick or injured? We put $100 away a month into a savings account for right now because that's what we can afford to. But $20,000?

I think we should start investing in some sort of retirement thing NOW...even if its just a little bit every month...even as you say, $20. I don't care what the banker says. Our district right now doesn't offer a 401K or anything....

What do you think?
on Mar 05, 2007
I know you asked Brad rather than me, Marcie, but alow me to offer my two cents, if I may.

I think you're off to a good start with the $100 a month. When your savings gets up over $1000, you might want to think about putting that into a CD to get the higher interest, then continue with each $1000, staggering the CD's so that they mature at different time. Within 5-6 years you should be able to start looking at some mutual funds with the interest off of the CD's and a small amount of additional income (that you could put aside as you get some of your bills paid off).

That's what I'd do anyway. But we're not in the same financial ballpark as Brad, so I'd defer to him on this.
on Mar 05, 2007

The banker (and I) would say that you should first eliminate any debt that has a higher interest rate than what your investments earn in interest rate.

So for instance, if you have credit card debt at 18%, pay that off first.

Then invest $20 a week. Even if it's in a CD that's still liquid. Make sure you're getting some interest. Even a money market account with 3% interest will pay off over time.

on Mar 05, 2007

We should save some savings out of the CD for emergencies though...right? So we don't have to pull the CD and pay a penalty? (Sorry...I'm exceedingly stupid when it comes to money...obviously...hence all the debt).

Since I'm in graduate school, I'm qualifying for student loans. I'm taking all the subsidized federal student loans I can, and taking the extra and paying off the high-interest debt we have. That makes sense, right?
on Mar 05, 2007
And we switched to a money market savings...they want you to have a minimum balance of like $5000 but if you transfer at least $75 in a month they don't charge you the fee. And we do we made $.06 this month. Whoooeee! lol
on Mar 05, 2007
Since I'm in graduate school, I'm qualifying for student loans. I'm taking all the subsidized federal student loans I can, and taking the extra and paying off the high-interest debt we have. That makes sense, right?

Depends on who you talk to. Student loans are usually a killer for a lot of folks. But it does make sense to transfer high interest debt to lower interest debt when you can.

As for the CD's, yes, you need liquid assets, and need to keep that in mind.

Again, though, go with Brad's advice before mine. He's the proven one. I'm!
on Mar 05, 2007
Great explanation! We have a local show on the radio that basically is saying the same thing. Build assets and let them work for you.
on Mar 05, 2007

Marcie, chances are, there are $20 worth of things that you purchase every month that you don't need to.  For instance, even if the two of you ate fast food for dinner twice a month, there is your $20.

It's all a balance.  I have debt from just things that happened, and most of it is over what the current interest rates are, but I still save money (especially with my 401K, since there is a match and it's pre-tax).

Chances are, unless you make a really hard stance on finances, the $20 that you could devote to savings won't be saved or paid on debt, but rather be spent on lifestyle choices, as most people (me included) do.

I totally don't use credit cards anymore.  We have one emergency one (which would only be used in a real emergency) and I cut the others up.  Instead, we have a Visa Check Card.  I only put as much money in as we can afford to spend a month on gas for the cars and all the incidental crap that is needed in a month.  The rest stays there for when we decide to take a trip or need to buy something larger.  If there isn't extra money, then it just doesn't get bought.  Credit cards are pure evil.  However, if you have a credit card that you are paying on, don't close the account.  Keep it open and in good standing (especially while paying on it) to gain good credit.  Just cut it up so you don't use it

on Mar 05, 2007

Brad...I am a very cautious investor.  In the past I just wanted to leave it in savings....with minimal IRA and mutual fund activity.  We took a big hit on tech stocks some years my husband really liked them and invested quite a bit.  We STILL haven't recovered the money we lost in that.

But my husband pushes for investment and I do see its benefit.  It is strange territory for me.

Anyway, we have invested but not tons since the tech stock thing.  I emailed this to him, though its stuff he already knows.  But its nice to get confirmation.

Got any mutual funds you like with at least 10 years growth? hahahaha

on Mar 05, 2007

Hi tova,

A diversified portfolio is always critical.  Stocks aren't the only form of investment I'd recommend.  A decent chunk of my "nest egg" is in long-term CDs which get around 5% interest. There are also municipal bonds which often pay without you having to claim the income. And of course there's property.

I mentioned elsewhere that I bought land on Higgins Lake Michigan and have built a cottage on it. I plan to use the cottage quite a bit of course but it's also an investment. Lake front property is something I am trying to acquire as my assets grow because I think it'll appreciate as the baby boomers retire and cash in IRAs and 401Ks and want to retire to the lake which will drive up prices. I don't know if that'll happen but that's what I think will happen.  But if not, I still have a cottage that we can vacation to and it'll still appreciate over time.

on Mar 05, 2007
A decent chunk of my "nest egg" is in long-term CDs which get around 5% interest.

I believe that is where a healthy chunk of ours is too. There just seems to be so much we don't know about investing, it can be scary.

Your lake house does sound great. We have also purchased property (about 50 acres, all woodland) for the same reasons. IT is paid for! Woot.

But we can't really pay off a house because we move every couple years. But we buy and then usually when we sell we make a little profit (though not always) and stick it away for when we settle and build for real.

I am directing my husband to this article's comments...heh. He doesn't read a thing I write, but I am sure he will read this!

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