Every journey begins with a first step, and believe me, investing is a journey. How is it a journey? Well, start by thinking about what exactly a journey is.
When we talk about taking a journey, we’re talking about a trip from one point to another. We start at a beginning point, wherever that is, and take a trip from that point to wherever our destination is.
Typically, we think of journeys as having the characteristic of being lengthy, and that’s not too far off the mark. After all, when I drive from my house to the grocery store, I don’t describe that trip as taking a journey (although, given how inefficient I am at finding things on the grocery list once I’m there, the shopping itself might rightly be classified as a journey!). But thru-hiking the Appalachian Trail from Springer Mountain to Mount Katahdin? Now that’s a journey!
As ministers of the gospel, we perhaps find ourselves referring to the life of a believer as a journey, or one’s “faith journey,” when speaking colloquially. And what we, or other Christians, mean by that terminology is that from the point of placing faith in Christ to the point of our eventual deaths and entering into the Lord’s presence to be received by him is typically a lengthy period of sanctification and growth in spiritual maturity.
For example, if one is at the same level of spiritual maturity as an old man that he was when he came to faith in Christ decades earlier, something isn’t right. We know there should be progression there, as one is led by the Spirit into further Christ-likeness.
So when I describe investing as a journey, what I mean is that when one is investing, he or she is trying to travel from point A to point B over what should should be considered a lengthy amount of time. But what are each of these points?
Point A is “Never have invested a single dollar”-ville. Point B, for most of us, is going to be “Financially secure retirement”-ville. And the journey we take from getting from the former to the latter will take place over the lengthy period we refer to as our investing lifetime, which should be decades.
Admittedly, you readers are going to come to the blog already being at various places of the journey from point A to point B. Some of you have already been investing in a retirement account for years, though perhaps without really feeling confident that you understand what to invest in and why. Others have never invested a single dollar in any account, though plan to, because they know they should be investing.
Maybe even some of you have wondered if you’ll ever be in a position to invest at all because you don’t see any point in the future in which you will not spend every dollar you earn. Regardless of where you are on the investing journey–even if you’ve yet to begin–this blog is for you.
But what unites all of us here is that the first step of the journey should be the same for all of us, regardless of the circumstances above. No matter who we are, no matter how much money we’ve already invested, no matter how much money we’ve yet to invest, the first step to becoming an investor should be universal. And what is that first step?
The first step to becoming an investor is realizing that you must invest in order to meet your financial goals.
Now on first blush, that may sound self-evident. In a way, it is. But there’s actually a lot more packed into that statement than you might initially think. Let’s break it down into two parts.
First, there is a realization. The person who becomes an investor is someone who realizes something: in this case, the need to invest. And if we’re being honest, there are many, many, many Americans out there who, though they may know that investing makes money, will go their whole lives never learning of the need to invest, for whatever reason. It’s unfortunate, yes, but it’s true.
I’m not talking about someone who learns of the need and then never invests. I’m talking about someone who never truly realizes the need.
We don’t have to get into all the reasons why either one of these scenarios might happen, nor the fairness of them happening to some individuals and not others. When it comes to opportunities, whether in investing or in anything else, life is not fair. I wouldn’t be doing anyone any favors here if I pretended otherwise.
I grew up learning of the need to invest at an early age. If the statistics are correct, most of you readers did not. That’s not fair. I know it’s not, and so do you. But it is what it is.
You’re not here on this blog to compare yourself to someone you know or to someone on the Internet, whether that’s me or anyone else. You’re here to learn how to invest successfully, and that’s exactly what I aim to teach you over the many posts to follow this initial one.
That said, in reading this post so far, some of you now know of the need to invest, if you didn’t already. Others of you perhaps were previously in the group of Americans described above who had never realized the need to invest. You’re no longer in that group. That’s good news. We’re on the right track.
Secondly, we have the details of the realization. The realization is that there is a need to invest, yes, but specifically for the purpose of meeting one’s financial goals. And here’s where we have to face one of the most important realities in all of personal finance: You cannot meet your financial goals–most importantly, a financially secure retirement–if you do not invest. I’m sorry, but there’s simply no getting around it.
But how can that be the case? I mean, surely if you were to save enough money for years and years without investing it, when you get to your retirement years you’ll have enough, right? No. Most likely you will not. Here’s an example.
Let’s say that you begin a career at age 23 and will retire at age 65, working for 42 years. And let’s say that your salary is $50,000 gross annual income and never increases with raises, promotions, job changes, or cost of living increases due to inflation (I’m simplifying here, I know).
You have a really high saving rate of 30%(!) of your salary (very, very few save this much). You’re saving $15,000 annually for 42 years. You never invest this money. So at age 65, you end up with $630,000 to fund your living expenses for the rest of your life. Wow, that’s really good, right?
But let’s also say that in your retirement years, you want to maintain the same standard of living you had while working. Most people would. Taking out your initial 30% saving rate, you were effectively living (including the money you give as tithes, offerings, and other charitable gifts) on $35,000 annually.
We’ll assume you’ll also receive a Social Security benefit of approximately $1,670.00 monthly, or $20,040 annually (using the Social Security Administration’s online estimated benefit calculator). So if $20,040 of your annual living expenses are covered by Social Security, you need an additional $14,960 annually to cover the rest of your $35,000 annual living expenses. Your $630,000 in savings will last you 42 years, ultimately being fully expended at 107 years of age. That’s great, right?
What’s the problem here? You’ve probably already guessed it. Are you, the reader, currently age 23 and will you be saving 30% of your gross annual income every year for the next 42 years? In all likelihood, no. Most of you are older than age 23, and on top of that, most of you probably do not save 30% of your gross annual income (I know I don’t!).
So then what would happen if we dropped down to a more standard 15% saving rate? You’re now saving $7,500 annually for 42 years. You never invest this money. So at age 65, you end up with $315,000 to fund your living expenses for the rest of your life.
But again, you want to maintain the same standard of living you had while working. Taking out your 15% saving rate, you were effectively living (including the money you give as tithes, offerings, and other charitable gifts) on $42,500 annually.
Going back to your Social Security benefit, it’s still the $20,040 you will receive annually. So with $20,040 of your annual living expenses covered by Social Security, you now need an additional $22,460 annually to cover the rest of your $42,500 annual living expenses. Your $315,000 in savings will last you 14 years. You run out of money at age 79, at which point you must then live a meager lifestyle supported only by Social Security. (And, of course, this assumes that you saved 15% of your gross salary faithfully for 42 years straight!)
But what would have happened had you invested that $7,500 annually and earned a 5% annual rate of return over that 42 years? At age 65, you would have ended up with $1,064,950.04.
By simply saving and not investing, you ended up with $315,000. By both saving and investing, you ended up with $1,064,950.04.
That difference (though presented in a simplified example), dear reader, is what we’re talking about here, and it’s a matter of make or break. If you had only one financial goal, and that goal was to have a financially secure retirement, the hard truth is that you must invest in order to get there. And considering that funding one’s non-working latter years of life on this earth is the most important financial goal there is, that means we’re also talking about making sure we are on track to meet that goal before we pursue any additional financial goals.
So back to the main point: The first step to becoming an investor is realizing that you must invest in order to meet your financial goals. Before you learn anything else as far as investing information is concerned, no matter how beneficial that information might be, it is more or less for naught if you do not first realize why you are investing and just how important it is.
You’re not investing to make a little more money to spend this year. You’re not investing to try to “hit it big” with a “hot stock.” You’re not investing to buy a brand-new luxury car sometime later in life. You’re not investing just because you have a vague sense that making a small contribution to your church retirement plan is a good idea.
You’re investing because you know that you must. You know that there is no other choice if you’re going to meet your financial goals. You know that if you are going to have a financially secure retirement awaiting you in your latter years, investing is the only way for you to get there (barring a large inheritance, which is rare and never guaranteed).
This is the first lesson any successful investor has to learn. You must invest.
But investing is a journey, is it not? I said as much at the beginning of this post. It is a journey. And I’m here to walk with you through it, to help you go from Point A to Point B successfully with sound investing principles built upon mounds of academic and mathematical evidence that has shown what has worked consistently over time.
Are you ready? Read on.