A Walk Through the Investing Park
Good news/ bad news: Your crazy Uncle Larry just died. Sad, but you weren’t that close anyway, so… oh well. We all gotta go some time. Uncle Larry lived in a dilapidated shack and drove what he called a car, but was really more of a pimped-out bicycle. Back when Larry had some shred of sanity, about 13 years ago, he invested in what he thought was a fruit company. He always did enjoy a good Granny Smith or Red Delicious.
In his will, he left all those shares to you. Never mind that Larry had four kids of his own whom he totally forgot about. We told you he had lost his mind. For some reason, he liked YOU.
He paid a small hill for ‘em back in 1999, and now they’re worth a towering mountain. He invested $50,000 at 30 bucks a share – it went to $600 before he died – that fifty grand ballooned to $1 million. Talk about growth.
And he left it all to you. So now you have half a million bucks. (Why just half? Taxes. Yep, they took half. Like a divorce from your money each year.) But whatever – a big half million works. Awesome. Owe you one, Larry.
The question is... what do you wanna do with this windfall of yours? What are your life goals? Do you just want to stop working? Half a million dollars does not, unfortunately, go as far as it used to. (In 1932, you could have bought Newark with it.) Today, you could probably survive if you lived the rest of your life in a tiny apartment, lived a minimalist lifestyle and got yourself a bus pass. But you just came into a lot of money. Do you really want to live that way?
On the other hand, let’s say you instead want to take this chunk of change and turn it into an even bigger chunk. With your 500k after tax dollars, you can buy plenty of bonds and, after taxes and fees and so on with relatively low risk, you get 20k a year to live on. Nice, but will that cover your apartment, food, health insurance, etc.?
Again, probably not. What if, to supplement the 20k, you work part time - 2k a month waiting tables at a local family restaurant?
So now you’re earning 24k from your job job – add that to the cash you’re bringing in annually off the 500k and you are now taking home 42k a year. That much is livable. Until, of course, inflation rears its ugly head (it’s not even beautiful on the inside) and your $1,200/mth rent rockets up to $2,000/mth. Then say it’s 8 years from now and you are running out of money and have no career because you thought Uncle Larry’s last gift would have you set for life. Oops.
Now, what if we told you that, by learning some basic investing concepts (or some advanced ones, if you’re up for it), you could take that same 500k and turn it into a veritable fortune? We know you really, really wanted to work at that restaurant, but could you get over it?
To really drive home the concept of “compounding,” rent the movie Gremlins. At first there are only a couple of these creatures. But then they multiply, and suddenly there are a dozen. In almost no time at all, the town is overrun with the little demons. Now imagine that those gremlins are your dollars. Wouldn’t make for as thrilling a horror movie, but would you care?
The idea of investing is to make one of your dollars grow into a couple of dollars. Then each of those dollars gets together and makes several more baby dollars. Before you know it, the whole thing has gotten out of hand and your money is making new money all over the place. You couldn’t stop it if you tried. Not that you’d want to try.
Of course, you need some money in the first place. And that means being 100% out of debt - $10,000 in the bank and $30,000 in debt does not qualify as “having money.” But, if you are free of credit card debt and can manage $2,000 or more in savings a year, you best invest.
Don’t let Uncle Larry’s death be in vain.