My Grandfather, who was a farmer until his sons went to college and then built homes, told me that a financial investor once said to him, “don’t work for your money, make your money work for you.” My grandfather started investing and when he passed away, he was a millionaire.
I have become a fan of Dave Ramsey and recently took his course Financial Peace University. He has what he calls “Baby Steps”, the fundamentals which are:
- Save $1,000
- Pay off ALL debt
- Build an Emergency Fund with at least 3 months of expenses (and eventually a year or more)
- Invest 15% of your household income
- Save for your children’s college fund
- Pay off your home early
- Build wealth and GIVE
The thing is…I knew this! I had been told the wisdom of this myself and I am mad at myself for robbing me of what I could have had for what I wanted right then. Don’t rob yourself like I did. Invest in yourself and in your family instead of squandering your money on food, drink, toys, and trinkets that will only satisfy you for a moment.
I wanted to give a quick primer on some investing concepts. First, what are some investing options? The most common are (from the most risky to the most conservative:
- Mutual Funds
- Publicly Traded Stocks & Bonds
- Private Businesses
Public Companies issue shares of stock during their Initial Public Offering. You can multiply the number of shares of stock times the currently stock price to get what is called a Market Cap or what the company is worth. For example, Dallas based oil company Exxon Mobile has 4.22 billion shares that are each worth $32.40 making the market cap $136.8 billion. You can buy one share of Exxon for $32.40, which would make you a shareholder or essentially an owner or a very small portion of that company.
How do you make money from stock?
There are two ways. First, public companies’ goal is to make a profit. They take this profit or earnings and divide it buy the number of shares and that is the Earning Per Share or Dividend. Exxon paid 4 quarterly dividends in 2020 of $0.87 each. So if you bought a share for $32.40, you would have made $3.48 or almost 11%. Second, you make money when you sell the share. As the company grows, the stock price should increase. So if you buy the share for $32.40, you are expecting it to be higher when you sell it.
How much money do you make from stock?
The best way to answer this is to explain Mutual Funds. The best investment strategy is to invest in several stocks. There are companies that do this and these are called funds. Mutual Funds typically invest in stock and usually invest with some type. There might be funds that focus on large companies or Large Cap or Large Market Capital (we talked about market cap above as being the number of shares times the stock price). Another fund might invest in different retail stores. Another health care. And so on. Usually they focus on an industry, business size, or region. Some funds are what they call index funds. Index funds invest in pretty much everything. One example is the S&P 500. This is an index fund of 500 different companies and is used as a benchmark. The S&P 500 average return for the last 100 years is about 11%.
So what is that worth over time?
Let’s say you invest 15% (as Dave Ramsey suggests) and you make $50,000 a year paid monthly. That is $7,500 a year or $625 a month. If you did that from age 25 to 65, you would retire with $5.37 million! Keep in mind, you have only paid $625 a month, $7,500 a year, or a total of $300,000, but you end up with almost 20 times that much! If you just invested $100 a month but made a return of 17% instead of 11%, you would have $6 million. In short, being disciplined and investing each month and getting a good return on your investment is what leads to building real wealth.
How do I get started?
First, open a brokerage account. There are several, but I personally use Vangaurd and TD Ameritrade. Once you open an account, you need to make a trade to trade your money for stock. You can set this up automatically and I would recommend putting more than half your investments in a mutual fund. Maybe all of it. You should have your paycheck automatically deposited into your bank and if you do that you can set up an automatically transfer to your brokerage. I get paid every other week and my tythe to my church and my transfer to my brokerage account happen immediately.