I was 25, I had just been hired at The Presslife couldn’t get any better – I was financially ignorant, but I didn’t realize it.
I lived in a huge apartment on Saint-Laurent Boulevard in Montreal. Initially, we were three friends living there. My friends ended up leaving to live on their own, and I decided to keep the apartment for myself.
“I can afford it; my salary is enough to pay the rent and the electricity,” I said to myself. In the evening, I happened to walk through the rooms of my apartment a little like a baron surveys his domain.
If I had to write down my finances at that time, I would probably have given myself an A+ because I had no debt.
With hindsight, it’s more of a C- that I would give myself.
I was saving and investing $225 a month in an RRSP at that time. With each investment statement, I was curious to see if the market had made me richer.
Each time I was disappointed. Beyond my contributions, my investments hardly increased in value.
What no one had explained to me was that when you start on the path of investing, the stock market can’t do much for you.
American self-realized billionaire Charlie Munger once said, “The first $100,000 is a pain, but you have to do it. Whatever you have to do — if that means walking everywhere and not eating anything that wasn’t bought with a coupon, find a way to get your hands on $100,000. After that, you can ease off the accelerator a bit. »
Starting from scratch is difficult because almost every dollar comes from our savings. It’s a bit like trying to start a fire. Our first task is to collect as much dry wood as possible, not to stare at a piece of wood expecting it to spontaneously warm us up.
For example, someone with $10,000 in their investment account will end up with $11,000 after one year if the market goes up 10%. It’s better than nothing, but that extra $1,000 doesn’t make you feel rich.
But adding $6,000 of savings to $10,000 investments automatically boosts them by 60%. No investment can guarantee such a return.
After years of saving, when our investments eventually exceed $100,000, something magical begins to happen. The stock market realizes we exist. He unhooks the velvet cord and allows us to enter the den of compound interest.
The term “compound interest” simply means that the market makes our investments grow, and that growth also begins to grow, causing a leverage effect. It is this leverage effect that enriches us in the long term.
For example, we can add $10,000 to our investments of $100,000 during a year. At the same time, the market may grow our investments by $10,000 that year. We are at $120,000.
Over time, saving is less and less necessary. Adding $10,000 to $500,000 investments increases them by 2%. But, with a 10% return, the market alone can add $50,000 to our investments that year. At $1 million, the market can make us $100,000 richer in one year, or 10 times our savings.
My examples are linear – that’s of course not how markets behave. Stock market returns have hovered around 9% per year in Canada and 11% per year in the United States for half a century. But that’s an average. The market almost never makes 9 or 11%: one year, it can gain 30%, lose 18% the following year, climb 15% the following year… No one gets rich in a straight line.
That’s why enlightened people like me keep telling young people starting out on the job market not to fall into the trap of increasing their lifestyle (changing vehicles, new homes, shopping online, etc.) and rather to save and invest part of their income.
For example, $500 per month invested in a diversified portfolio of 80% stocks and 20% bonds (e.g. Vanguard’s VGRO funds or BMO’s ZGRO funds) for 10 years is worth nearly $100,000 today. today. And if that yield and savings were to continue, that portfolio could hypothetically be worth over $300,000 in 10 years.
At $1,000 a month in savings, we would be at $600,000 in investments after 20 years, based on historical returns. And, at $1,500 a month (not accessible to everyone, but as a couple, that’s $25 each a day), we’d be close to a million dollars in two decades.
Taking a gap year, making a career change or working part-time becomes a lot more accessible when you have 600,000 or 1 million employees working for you behind the scenes…
But, at the start, you don’t get out of it: you have to work hard to accumulate the first $100,000.
If only we could be taught that in school…