Or: A $0.75/hr Raise Is Worth More than You Think!
In addition to our traditional investment management services, Summit offers a computer guided or, as it’s sometimes known, Robo investment option at a correspondingly lower management fee. Many of the clients electing to utilize our Robo service are relatively young and many are just starting out on building wealth through investing.
If you’ve given any thought to investing, you’ve probably heard the following advice:
- Start when you’re young so that you can take advantage of the power of compounding
- Set up a regular contribution and automate it, if possible, to avoid the temptation of spending your investment dollars on something else “just this once”
- Be sure to take advantage of your employer’s match of your retirement contributions, if they offer one, as it is “free money”
All of those things are true and important. You’ll get no argument from me on any of them.
But, one question that they don’t answer is: “How do I get started?”
Here is one great way to get started. The next time you have the happy experience of being called into your boss’s office to be told you’re getting a raise, do this. Forget about it. That’s right, you should go home, celebrate a little, and then forget about the raise, except to arrange to have the additional income invested on an ongoing basis. You are living on a budget with your current income already, just continue on and spend that extra income on your future self. Let’s put some flesh on those bones and see what could happen.
How To Turn an Extra $0.75 into a Whole Lot More
As an example, we’ll look at the case of a young (25 year old) professional, Carly, who’s currently employed and making $40,000 per year. Carly gets the news that she’s receiving a 4% raise for the coming year. That’s about $0.75/hour or $1,600 a year pre-tax, and probably about $1,200 after-tax.
While being able to spend an extra grand or so on clothes and going out would be nice, it won’t make a real difference in Carly’s lifestyle. So, let’s see what could happen if Carly were able to invest that amount and make an 8% annual return (to put that assumed return in context, the stock market has returned just over 10% on average annually since 1926).
Monthly investment: $100 (i.e. $1,200/year = $100/month)
Rate of Return: 8%
Years to Retirement: 42
Value at Retirement*: $414,896
*Source: https://www.investor.gov/financial-tools-calculators/calculators/compound-interest-calculator
Personally, I find that pretty compelling. Over $400,000 for future you by investing less than 4% of your current income. And here’s the best part, you can do the same with all or part of next year’s raise, too. And the next and the next and so on.
“Cheap” Daily Routines Are Surprisingly Expensive
Here’s another way to provide for your future self: make a budget cut and invest it. Continuing on with Carly, she is so enthused by the numbers above that she decides that she wants to invest even more. She knows that she is spending too much every day on little things, like getting breakfast on the way to work. Every morning on her way in she stops at a convenience store and buys herself coffee and maybe an energy bar.
That costs her about $3.75 each day on average including sales tax.
She knows that she can get free coffee at the office. Maybe not as tasty but it still has caffeine. What can she save if she cuts out the morning stop? She usually works 20 days a month, so 20 x $3.77 = $75. $75 per month is three quarters as much as her raise, so that means her future self could have an additional $311,172 (bringing the total to over $726,000) in her account at retirement just by drinking different coffee (and cutting a stop from her commute also saves gas money, which we aren’t accounting for right now).
That $3.75 daily routine is very expensive when considered over the long haul!
Coffee is just one example of a potential source of investment funding. Maybe you don’t have a coffee habit or you’re already smart enough to drink office coffee. Either way, many of us have areas in our life where we spend more than we realize or need to. Take a few minutes to go through your spending habits and find one you could trim or eliminate without changing your lifestyle too much.
As we just showed, the amount you save each day doesn’t really need to be very much.
$3.75 every weekday adds up to $311,000 over the course of your career. What could you change to save $3.75 per weekday (or $2.65 including weekends)?
Of course, there’s no guarantee that Carly will make 8%. Nonetheless, the point is that with a little bit of planning and self-control, you can take charge of your future and make it better than it would be otherwise.
Go to the link above to experiment with your own finances to learn what you could accomplish. Your future self will thank you.
