Note: This post was first published in Setember 2020 and updated in March 2022
A while ago, I was scrolling through Instagram when I stumbled across an interesting chart.
The author of the post was making the point that the amount of money you should save/invest is really a function of two things:
- Your investment goals (i.e. how much money you want to have), and
- Your investment horizon (i.e. how much time you have to get to your goal)
Here’s the chart itself:
All straightforward (and very helpful) personal finance stuff.
However, what struck me as I was looking at the chart was the absolute disparity between the various columns.
Start at 25, sock away $310/month, and boom – you are a millionaire by the age of 65.
All in, you’ll put away just under $150k over 40 years. The stock market will take care of the rest, multiplying your money more than six times along the way.
Didn’t get started at 25? No need to despair.
You can still get there – but if you start at 30, you’ll need to chuck in $467 a month instead. By the age of 65, you are all caught up.
Cool $1m in your investment account – but your tardiness has cost you.
Your contributions were about 50% higher – and the stock market didn’t work nearly as hard for you.
Over a period of 35 years, it has quintupled your money. Not too shabby, but not nearly as good as the six-bagger your 25-year-old alter ego got.
The way this story plays out shouldn’t be a surprise to anyone:
The later you start, the less time you have to take advantage of the magic money machine – and the opportunity cost is nothing short of astounding.
Unfortunately, there are many, many people in this world who are very good at budgeting and saving money – but those same people just cannot bring themselves to pull the trigger when it comes to actual investing.
As a matter of fact, I was in the same boat for a very long time. My parents were great at instilling the right savings habits – but not so much when it came to investing.
It felt scary, and so I put things off. I started saving money back in 1999 – but didn’t get into the stock market until five years later.
It didn’t end at the stock market either. By the time 2006 rolled around, my (future) wife and I had saved enough for a down payment on my first property. But it took us another four years to finally pull the trigger.
We ended up buying a condominium in 2010 – and have done very well with it.
However, I literally get tears in my eyes when I think that four years earlier, the same amount of money would have gotten us a fully detached house.
Had we not been so scared to invest, our net worth would have been at least $1.5m higher today.
Based on our current run rate, that’s about two years of my life. Two years out of the work grind, spending time with my children, and having complete control over my time.
Tick tock. Tick tock.
The Invisible Thief
When I was buying our first commercial property back in July 2020, my mom called me and asked: “Aren’t you scared you will lose money? Look at what’s going on with Covid! Wouldn’t it make sense to hold on to the cash?”
What do you say to that? Any investment comes with a risk of loss. That’s why they are called risk assets.
Unfortunately, the alternative of a possible loss is a guaranteed loss. Because whether you like it or not, inflation will keep eating away at the purchasing power of your money.
It was true at a 3% inflation rate, which is whereabouts inflation was back in 2020. And it’s even more true in today’s world, with inflation touching double-digit territory:
And so that’s exactly what I told my mother. All in, my down payment and associated expenses came to about $300k.
At an 8% inflation rate, that money would lose its purchasing power by $24,000 a year.
$2,000 a month. Sixty-seven bucks a day.
Like sand sifting through your fingers. And the reality is that the only way to avoid the loss is to get – and stay invested.
At the end of the day, what’s done is done. No point dwelling on the mistakes of the past. We all make them – the point is to learn from them and move on.
What I’ve learned over the years is that as investors, the question we ask ourselves most often is:
“What happens if I invest?”
But instead, the really important question we should be asking ourselves is:
“What happens if I don’t?”
As always, thank you for reading – and happy investing!
About Banker On Fire
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Banker On FIRE is an M&A (mergers and acquisitions) investment banker. I am passionate about capital markets, behavioural economics, financial independence, and living the best life possible.
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