"Fun Money" Fridays
Ep. 4 PUT YOUR 💰 TO WORK FOR YOU!
You've hustled for as long as you can remember, working 💪 hard for the money!
So now, you’ve taken every episode this far to heart and implemented it. You have successfully paid yourself 1st at least 10% every month, tucked away 6 months of savings in an E-fund (Emergency Fund), simultaneously crushed your debt by eliminating it, stacking the odds in your favor, so NOW WHAT?
The wheels start turning and you start thinking:
“If the banks are investing my hard earned money, just sitting there in a checking and savings account barely “breathing” and they're earning double digit interest on it by lending it out OR investing it, then why aren't I?
The number #1 culprit, FEAR.
The Fear Factor is crippling and literally counter productive, like it produces nothing good, unless… you act on it!
The irony is, instead we let “lazy money” ( a for real term used in finance ) sit around accruing little to nothing and depreciating every year so we can buy less but "feel" safe.
So if I can provide you with knowledge to eliminate the fear of not knowing enough about investing, if you know better, what would you do different if fear wasn't a factor?
First let me quickly share this LESSON:
If your money is parked in a regular savings account what are you saving?
A depreciating asset.
You see, not only is it slowly losing its value hanging out there, those accounts have generally earned .01 % or less, let me use the Rule of 72 from last episode to show you what that really means.
72 ÷ .01 = 7,200 years for your money to double
If you put $1,000 away at age 25, you will have a whopping $2,000 by the time you're 7,225 years old 🤑
Or your great, great, great great greats, great, super great great great, exceptionally great grandchild Bad Ass Barely Babe will have it! Ain’t nobody got time for that.
Oh wait… MINUS TAXES!!
Right, there's that pesky little nuisance to consider.
So $2,000 in 7,200 years minus taxes ( let's be kind and say taxes will be 25% by then cuz we really don't know what it will be ) = $1,500
Hmm, can we even call that an inheritance?
That just isn't gonna cut it if you're trying to build something in order to leave a legacy.
Okay, now that that’s established let’s learn a little.
STOCKS: A type of investment that represents ownership, you now have shares in a company that may go up or down and can be sold for a profit.
BONDS: A type of debt. Similar to an IOU. There is a contract between two parties. Borrowers issue bonds, investors willing to lend them money for a certain amount of time buy bonds, like buying debt. It operates similar to how a credit card would. You loan money to a company and they pay it back to you with interest.
With those two distinctions in mind, let’s converse about it a bit more in depth. Since the deep seated fear is most often a fear of losing the money you hustled so much to make, let’s alleviate a little of the guess work by answering this question, shall we…
What are some simple Risk Management Strategies?
EXAMPLE 1: Not having your eggs in one basket aka DIVERSIFICATION
Riding Elevator A is Bob ~
Bob wanted to try his hand at investing, he figured he would go with a tried and true company, so he grabs the bull by the horns and goes all in. He buys a bunch of stock in one company and is sitting pretty.
What he didn’t anticipate was a news report coming out speculating that using the companies product causes cancer. What happens to the cable when the company takes a nose dive based on the report…SO DOES BOBS ELEVATOR!!
Riding Elevator B is Brenda ~
Brenda on the other hand had an inkling that she wanted a few tools in her tool belt and she chooses a group of companies to invest in, the “Pupu Platter” of investments, if you will, consisting of a variety of strong companies, one of which is Bob’s company of choice. What happens to her cables when that one company takes a nose dive…SHE MAY FEEL THE SHAKE BUT FOR THE MOST PART, BRENDA IS SITTING PRETTY.
(According to the image, Brenda is schooling Bob on how it all works, hehe)
Which elevator would you choose? B right!
That is a brief example of diversification and it’s benefits.
EXAMPLE 2: Slow and Steady wins the race aka DOLLAR COST AVERAGING
By a show of hands;) At a glance, if you had to pick,
which one would your gut tell you to chose Graph A or Graph B?
Yes, it is a tricky question with an eye opening lesson behind it!
GRAPH A GRAPH B
Your favorite advisor has told you to invest $100 dollars every month no matter what, you decide to do so consistently for 3 months in a row, let’s take a look at the results:
Graph A Graph B
$100 / $100 / $100 per month $100 / $100 / $100 per month
$10 $12 $15 cost per share $10 $1 $5 cost per share
10 8.3 6.7 # of share 10 100 20 # of shares
Time to do the math:
Graph A ~
You invested $100 every month, 3 months in a row the cost per share went up
$10 bought you 10 shares month 1
$12 bought you 8.3 shares month 2
$15 bought you 6.7 shares month 3
You bought a total of 25 shares, that ended up being worth $15 each when you sold
You spent a total of $300, ending up with a total of $375
YOUR PROFIT IS: $75
Graph B ~
You invested $100 every month, 3 months in a row the cost per share fluctuated
$10 bought you 10 shares months 1
$1 bought you 100 shares month 2
NOTE: (what do people typically do in this scenario? They PANIC, SELL, and SOLIDIFY THE LOSS, once you sell you can't recoup. So you listen to your advisor and stay consistent)
$5 bought you 20 shares in month 3
You bought a total of 130 shares, that ended up being worth $5 each when you sold
You spent a total of $300, ending up with a total of $650
YOUR PROFIT IS: $350
MIND BLOWN right!?!?
The moral of the story is, you are not trying to time the market, it’s your consistency that will allow you to take advantage when things go “On Sale”, who doesn’t love 70% off at Macys?
The BIG TICKET IDEA ~ the name of the game is really how many shares you have in the long run.
Like Brenda, you now have two viable RISK MANAGEMENT STRATEGIES added to your tool belt to help you grow some of that hard earned cash.
I will leave you with this fun little poem, "WORK IT" to summarize it all and encourage you to visit again next “Fun Money” Friday when we get the skinny on taxes, tis the season.
More up close and personal than you ever wanted to be, but you’ll be glad you did to help avoid a potential future tax consequence, you never knew you had.
WORK IT 💰 by Nicola Lambo
There will be highs
And there will be lows
But knowledge is power
In the game where money grows.
What's the alternative?
It suffers this fate,
Losing its buying power
As it slowly depreciates.
Day after day
Your cash will buy less
If you do not protect it
And dare to invest.
One thing is certain
If it's up in the bank
The interest you're earning
Won't even rank. At a rate that is
Doubling every 7,200 years
Rule of 72 makes that fact very clear.
So the money your holding
In a place to keep safe
Suffers the price
Of a chance you won't take.
So let's get you learning so you
Know a few things
So your money is earning
And your family can win.
Til next time! Stay well,