dimanche 23 septembre 2018

How to make 20 000\$ a year without any effort by the age of 36?

Here's a simple exercice that some people have already made, but I think that it would be very useful for many many many many people to think about it and manage their money in consequence.

Let's say you're 25 years old. Let's say you can save 10 000\$ a year. It's ambitious, but many people could do it if they put a little effort in it. Let's say you have enough investment knowledges to manage your money in a way that you can get the performance of the market which is about 10% a year. Otherwise, just buy a fund that reproduces the performance of the market and you'll be OK.

Here's what it would look like over time:

25 years old: 10 000\$ (savings)
26 years old: 11 000\$ (savings + performance) + 10 000\$
27 years old: 24 200\$ + 10 000\$
28 years old: 37 620\$ + 10 000\$
29 years old: 52 382\$ + 10 000\$
30 years old: 68 620\$ + 10 000\$
31 years old: 86 482\$ + 10 000\$
32 years old: 106 130\$ + 10 000\$
33 years old: 127 743\$ + 10 000\$
34 years old: 151 518\$ + 10 000\$
35 years old: 177 670\$ + 10 000\$
36 years old: 206 436\$

Here you are: 36 years old and you have a portfolio of 206 436\$ after only 12 years of savings. And now, each year, your portfolio should grow by about 20 000\$ without any effort.  In other words,  your income is now 20 000\$ higher than all the people around you who didn't put any money on the stock market. If you continue like that just a few years, you'll get 30 000\$ a year before you're 40.

Some people call it the power of compounding. I call it the power of discipline. In fact, it's a combination of both. Isn't it fabulous? Your income is now a kind of bonus because there's a mountain that keeps growing besides you without any effort.

Start early;
If your portfolio goes down, continue to invest;
If your portfolio goes up, continue to invest;
Continue up to a point where you don't see the point of investing some of your income because it's too marginal versus the size of your portfolio. That's when you'll know that you are rich.

6 commentaires:

1. The first \$10,000 was a pain. Thought I hit the jackpot at \$100,000. Astounded how fast it was to get to \$200,000 and beyond. Compounding and lessons learned will hopefully get me to \$1,000,000 before I'm 50. I find as I get older and house renos, cars, wants, etc. are already satisfied I'm discovering that I don't want or need as much stuff as I thought I did and have more more money to invest. Getting the kid out of daycare and into school helps too!!

1. Great comment! The hard part is to start. The more you invest, the more you know what you're doing and everything is quicker and easier from a certain point.

2. It is hard to start a portfolio when you are young when at the same time you save for a cash down on your first property. It can be more of a challenge when you live in a city where real estate is expensive. In any case,for me is buy your first property first and build your portfolio after

2. Ironically, I was promoting saving, investing, and the power of compound interest to some younger folks (my brother and cousin) a few days ago. It is a topic that is always a hard sell to younger folks who can't even envision there is life 30 years later. Then to support my argument, I hesitantly mentioned that I have even heard Einstein promoted it, but I really wasn't sure if it was a made up story. Well, It turns out that he actually did according to this article.

Albert Einstein called compound interest the “eighth wonder of the world”, adding: “He who understands it earns it; he who doesn’t pays it.”

Very good article. It's old, but the lesson hasn't changed and is simple and clear. Start saving as soon as you can, continue your contributions, and stay invested all the time. The sooner you start, time will do more of the heavy lifting for you. With this formula, everybody with some discipline can become rich, slowly.

https://www.telegraph.co.uk/finance/personalfinance/investing/10742396/When-saving-for-10-years-pays-more-than-saving-for-40.html

3. ...and BTW, shouldn't the line for age 27 be \$23,100 + \$10,000? Regardless, it doesn't change the lesson of your post.

1. Oops! You're right. I made a mistake!