I get asked all the time “What should I buy?” It’s assumed by many that the best way to financial independence is to find the right assets to buy so that your money can grow quickly. This is exactly the wrong type of thinking. Achieving financial independence isn’t about finding quick hit wins with your money. It’s quite the contrary. It’s about growing a sustainable financial portfolio where you don’t have to worry about it because it will take care of you.
This is where a lot of people are turned off by investing in general. It doesn’t lead to quick riches. It doesn’t mean they can retire early. In fact, the measly 5% or 6% gain a year is seen as a joke. What will an extra $5 dollars do with an investment of only $100? Why not buy Bitcoin and make that $100 become $1500 by the end of the year? This all seems like valid argument when your colleague in the office just made over $10,000 on their cryptocurrency bet while your own investment portfolio has returned mere dollars. In fact, it’s quite demoralizing because you will feel like you missed out on the investment (or gamble) of a lifetime.
But that’s the thing. It’s the emotional side that’s thinking right there not the logical. Sure, your colleague put a couple thousand into Bitcoins, but did they risk their entire life savings or are they willing to? What is the rest of their money doing, 1% GICs? Is Bitcoin going to continue to rise over the next 25 years like it did in 2017? What else are they investing into? It’s fine to have a bit of exposure and gamble with your money, but it’s not investing. Most people don’t put all their money into Bitcoin because they don’t really have faith in it. It’s a short term gamble. All the while their other assets are sitting dormant and not even keeping up with inflation or their lifestyle. Hardly a way to achieve financial independence.
If gambling on returns is not the way to get to financial independence, then how do all the people with blogs writing about retiring at 35 years old happen? What are they doing that is so successful that you can’t replicate? It always seems so easy from people that have made it to say how they became millionaires, but it’s so hard to replicate on our own. What’s the secret that they did that they aren’t telling. My answer is very simple: SAVE.
First off you need some form of income. Sitting at home with $1,000 in your bank account and 20 years of investing will never get you to early retirement and financial independence. However, at the same time you don’t need to have a six figure salary to make it. It all depends on the standard of living that you make for yourself and how you want to live.
That’s why the answer I give to people on how to start on their journey to financial independence is to save. I stress that when starting out that saving is more important than anything else. It’s more important than what investments to make or what type of accounts to use. At the end of the day, a larger savings rate will always exceed any gains of a portfolio that is small. Think of it this way. If you were to save $100 a month, that $100 contribution will far exceed any gains on any investment that money is put into for the year. It’s sad but true. So if you want to see larger gains, you need to make an effort to save more.
Also saving $100 here and there and not being consistent is also damaging. There should be an effort made to “paying yourself first” and being consistent about it. Too many people want to pay other people first (ie. buying a new iPhone X). That’s why by the end of the year, rather than having $1200 invested, the individual will have $500 instead and wonder why they went through the extra effort to make $25 in capital gains.
Save More, Invest (almost) EVERYTHING.
I can’t stress more that saving more is the BEST way to make your investment portfolio matter. Too many people make a half-ass effort to building an investment portfolio and then make the complaint that it does nothing for them. That’s because you’re doing nothing for your portfolio. Want to make $10k gains a year? Then start saving 20% of your take home income. Want to start seeing gains that pay significant bills? Then start saving 50% of your take home pay.
That’s how people get to their early retirement goals. It’s not about making gobs and gobs of money. But it’s about spending less, saving more and investing EVERYTHING! I also can’t stress that last part. Investing only 10% of your net worth is not going to help you reach financial independence. EVERYTHING needs to be invested! In fact, I personally don’t even have an emergency fund. That’s called my personal line of credit. I know fully well that I can sell my investment assets and get my money out in 3 days if I ever need it. So why not have my money working for me while I don’t have an emergency?
It’s not to say that you should receive your paycheque and quickly invest it into your investment portfolio, but money that is being saved for the future should not be left sitting idle. Having your savings sit around and doing nothing is the worse waste of the only advantage you have: Time. Time can never be recovered. Each day that passes by where your money sits idle is wasted productivity. Why leave your money unemployed?
Saving Beats Capital Gains
When I first started investing I realized that most of my gains were made from saving more. Many years later, I reflect on my actions and realize that saving more is what gets you faster to financial independence. As I wrote earlier, making 5% on $1000 just doesn’t seem that much when my own contributions on a monthly basis would far exceed the $50 yearly gains. That’s why when you start making more money, instead of spending it, just save and invest it. Get that $10,000 raise? Save the whole thing. Get a new job that pays more? Save the increase. Not only will you now be saving nearly $1,000 more a month, but that 5% gain by year end is going to be much larger. $500 sure looks and sounds a lot better than $50. Keep it up for another year and now the gains for the year could be closer to $1000 not $50. That’s now starting to equal a WHOLE month of savings! Crazy right?
The crazy saver and investor understands this. Bite the bullet early and save us much as early as possible. If you’re tackling debt, bite the bullet and stay with your parents, if you can, to get out of debt. This allows you to build a nest egg before heading out on your own. Having a $50,0000 portfolio before setting out can make all the world of difference. A 5% gain on $50k could equate to $2500 which could almost be 2 or 3 months worth of savings per month when living alone. Not only is the portfolio able to power it’s own growth, you’ll now be able to say that your portfolio is already covering a month’s rent for the year!
It’s not hard to fathom that someone making a $50k salary that is able to save 30% of their take home pay (around $12k in Ontario) can grow their investment portfolio to near $160,000 over a decade. That’s very substantial. With a $160,000 portfolio and a 5% annual average growth rate that’s almost $8,000 a year in gains. Now just imagine what that kind of savings rate can achieve with a larger salary like $70k or even $120k? Amassing an investment portfolio that is close to $300,000 per individual after a decade is not out of the question.
Those that have ridiculous $1M portfolios at 30 years of age can only be explained by a very successful bull run in the stock market since 2008 and a savings rate greater than 50%. They decided to have lean years in their 20’s so that they can enjoy their 30’s and beyond in comfort. To each their own right?
Save, Save, Save
The holidays are the worst. It’s difficult to save because of all the gifts you might be purchasing and all the outings you are having with your friends. It might seem overwhelming especially if you’ve been poor with your monthly budgets to begin with. That’s why it’s important to start the month off right. Put that money you want to save away first. Better yet, move it to another bank account so that you’re not tempted to use your debit card to withdraw the money. Only once you have those savings habits can you really achieve financial independence.
So don’t get upset you missed out on Bitcoin. Stop trying to chase one quick gains on the stock market. The best action to take if you want to build an investment portfolio is save. Make it a goal to increase your savings rate beyond 10%. Once you get that going, then start worrying about what assets to buy.