One of my favourite sayings is “if you do what everyone else does, you’ll have what everyone else has” and quite frankly, when I look around me, I’m not sure having what others have is what I want. Generally speaking, when it comes to money, most people are either in a ton of debt, have very little savings, have an insignificant income or a combination of all three.
Again, this is not a position you, nor I, want to be in. As such, if we want to get ahead financially, we need to take the road less travelled and one way to do this is to invest unlike the rest. As such, let’s dive into how much you should be investing if you want to live a financial life well above the average!
As I just alluded to, most people’s financial situations aren’t great. The median American’s bank balance has just $5,300 in it meaning that they are one major car repair or broken fridge away from having their piggy bank’s fully depleted. Ironically enough, the average American credit card balance is also $5,300 which may not seem overly consequential to you until you realize that if you’re only making the minimum payments on your card, it would take you nearly 3 years to pay off and cost you an extra $1,400 in interest. Finally, recent polls show that the median income for a single American individual is just $36,000 a year. I don’t mean to offend anyone who makes this amount of money but I think we can both agree that making this income is not going to have your racing up the Forbes list any time soon.
Therefore, as you can see, doing what everyone else does and having what everyone else has is not exactly what you want to aim for if financial abundance is your goal.
So far, we’ve talked about people’s propensity to save, manage debt and earn but the final piece of the financial pie we can’t overlook is investing. Now, let’s call it like it is, not everyone regularly invests. Some people are too scared to part with their money and would rather keep it “safe” in the bank. Others have no idea how to even execute a trade order and as such never give their money a chance to grow. Finally, we have those who don’t even have a dime in the bank to invest with therefore for them, investing is off the table.
Fortunately, over the past few years, more and more people have been taking an interest in investing and as someone who loves to see people’s money grow, this makes me extremely happy. In fact, as of 2020, nearly 15% of all investors in the market had just started investing that year so this speaks volumes to the incredible rise in interest in investing we’ve experienced in recent times. Now, while I love to see people using the stock market to grow their wealth, the unfortunate part is that most of them are doing it all wrong.
No, I’m not talking about the fact that many of these investors are trying to time the market or ride the returns of a hot stock. The issue goes much deeper. The issue I see is that many investors are simply not investing enough money to ever reach the financial success they desire. Why is that? Because they’re being told not to!
Terrible Investing Advice
From what I’ve seen and heard, financial planners tend to recommend people invest 10–15% of their after-tax monthly incomes. As we’ve seen, the median income is roughly $36,000 which after taxes is probably closer to $30,000. At the top of the range, at a 15% investing rate, this means that said person would end up investing $375 a month. Assuming a constant investing rate and income, if someone were to invest this amount for the next 40 years, at a 7% rate of return, they would be able to amass roughly $1 million.
For most people, the fact that you can be earning a widely attainable income and still become a millionaire in your lifetime if you start investing early is great news for everyone. However, there is one issue with this road to seven figures that most people who want to follow this path need to be aware of and we will dive into what it is and how to overcome it right now!
You see, whenever someone busts out their compound interest calculator, it’s easy to get excited as you project your future net worth if you regularly invest for the next few decades. The trouble is, there is a financial culprit that stands in your way of realizing the financial success you want. That financial culprit is inflation.
When most people play the compound interest calculator game, they tend to focus on gross returns. However, when inflation is factored into the mix, the results become much less impressive. How much less impressive? Let me share with you an example to illustrate just how underwhelming the results will actually be!
Using our prior example, if you were to invest for the next 40 years at $375 a month, you would end up with roughly $1 million to your name. The problem is that due to inflation, $1 million in 2060 won’t be worth anywhere near what it’s worth today. If we assume a conservative 2.5% inflation rate over the course of our example, what you would end up with as inflation-adjusted dollars four decades from now would be just over $370,000.
Now, don’t get me wrong, $370,000 is still a shit ton of money but is it $1 million? Not exactly. So, you’re probably wondering how much money you would need to amass to become a millionaire in four decades time and the number you must invest towards is much, much greater. Again, assuming a 2.5% inflation rate, to have $1 million worth of today’s money 40 years down the road, you would need to accrue roughly $2.7 million.
I know this is going to be a gut punch for some because saving and investing even to the point where they could amass $1 million is a challenge let alone $2.7 million. However, half of their issue revolves around being given the wrong financial advice. The truth is that, for the average person, investing just 10–15% of your income is not going to cut it.
You would have to be investing $1,000 a month for the next 40 years to reach this $2.7 million mark, which if you’re investing 10% of your after-tax income means you would need to earn $150,000 a year or more depending on the tax rates that apply to you. Now, I believe that everyone has the potential to make this kind of money but let’s face it, most never will.
As such, you need to ditch the common investing advice of investing 10–15% of your income and aim a little higher. What I recommend is that you aim to invest 40% of your income every single month.
I know this is going to be an intimidating number for some but it’s truly the only way you’re going to be able to amass a significant amount of wealth if you are and continue to be an average income earner.
Let’s go back to our prior example to see how saving and investing 40% can in fact make you wealthy. If you earn the median income of $36,000 or roughly $30,000 in after-tax income, you will have $2,500 to work with every month. At a 40% investing rate, this means that every month you will be putting $1,000 to work in the assets you choose to invest in. If we assume you receive an ongoing 7% return, that $1,000 month contribution will, over the course of the next 40 years, turn into $2.7 million. Does that figure ring a bell to you? It should because that’s how much you’d need to acquire to be a present day millionaire 40 years from now. Therefore, you’re coming to see that true wealth lies in taking the path less travelled when it comes to your own investing journey.
So, now you know that it is entirely possible to become wealthy even if you aren’t exactly cashing the biggest checks in the world. Pretty exciting right? You’ve sidestepped the mistake around inflation that most others make, however there is one final obstacle that you must avoid en route to financial success. Oddly enough, you look at him or her every morning in the mirror. Yes, as I hope you’ve already figured out, you are the only obstacle that stands in your way of achieving investing success.
What do I mean by that? Let me explain!
You see, in every example I’ve given so far, we have assumed one thing — that you are consistently investing towards your goal investment figure. The trouble is that most of us have never done anything for four decades. I mean, for me personally, I’m not even 40 years old and many of you aren’t either which means that we can’t even fathom doing something for this extended period of time. I mean, personally, in my 30 years of life, the only things I’ve been able to do consistently are eat, sleep and use the bathroom — everything else has been hit or miss!
As you can imagine, when inconsistency starts to make its way into your investment regime, you start to put your future wealth at risk. One missed contribution turns into five and all of a sudden you wake up one day with a year’s worth of contributions having been missed! Quite honestly, this is the last thing you want slowing down your path to wealth because as we’ve already talked about, you don’t need a massive income to get rich, you just need time, patience and consistency.
Now, while I can’t turn you into a patient person, I can give you a strategy, one that I use myself to ensure I never miss an investing contribution and if you want to use it to, keep following along.
The best way to ensure you never miss a contribution is to make it automatic. Kind of like how you automatically check your phone when you wake up in the morning but instead you are automating your investing process. Fortunately, most brokerages today allow you to set up automated investment contributions. In short, this process involves setting up an automatic deposit from your bank account to your brokerage account which then buys into the funds you’re pre-selected. I’ve been using this technique for about 5 years now and let me tell you, this has had my portfolio looking nicer by the year while also not letting forgetful old me not get in my own way.
Now, of course we can’t round out this discussion without talking about what kind of assets you should be putting all of this money into, right? The reality is that the options are endless. You can invest in real estate, stocks, crypto, bonds and a host of other different assets. As a catch all response to the question of what you should invest in, I think the main thing is that you invest in what you understand.
If you understand real estate then you should be able to find great properties that will not only appreciate over time but will provide you the cashflow you need as well. If you understand stocks then you may be able to find a ten bagger and significantly increase your ability to grow your portfolio in a small period of time.
Finally, if you are a cryptocurrency enthusiast, then you may be able to predict what the next major coin will be or foresee a coin’s price floor and buy in before the next boom cycle. What I’ve come to realize is that you can win by investing in any of these popular assets if you know what you’re doing. Some may look down on stocks if they believe real estate is the better asset class but I can almost guarantee an experienced stock investor will get better returns than a newbie real estate investor any day of the week. In short, it’s not what you invest in but how much you know about it and as such you’d be best off investing into those assets you’re most comfortable with.