#12 How to Save & Invest

One of the most important aspects to one's financial literacy is investing. It's a topic that doesn't get taught in schools but a valuable skill to learn: Making your money work for you.

So, let's ask the 1st of 3 questions: Why is it important to invest your savings?

1. It beats inflation.

   Inflation is the gradual increase in the price of goods and services over time, which reduces the purchasing power of your money. For example, imagine a cup of coffee costs $3 today. If inflation is 3% per year (typical in the United States) , next year that same cup might cost $3.09, and in 10 years, it could be around $4.03. If your money isn’t growing at the same rate, it loses value over time.

   If you were to keep your savings in a checking or savings account collecting 0.01% interest, your money is losing purchasing power over time. Therefore, at the very least, have an emergency fund with 3 months of expenses in a high yield savings account. With an interest rate of 4.5%, it should likely outpace inflation.

2. The 8th wonder of the world (according to Albert Einstein): compound interest.

   Compound interest is the principle that when you save money, as well as earning interest on the savings, you also earn interest on the interest itself. That might be a bit confusing & I'm someone who needs an example to understand it so let me explain it.

   To show the value of compound interest let's walk through a scenario. Person A begins investing at age 20. Person B begins investing at age 30. Both invest $5000 a year until the age of 60. The average return is 8% annually.

   Person A ends up with $1.3 million & Person B ends up with $567,000. A difference in $733,000. You might ask how is this possible? Although Person A only put in $50,000 more ($5000 x 10 years), they ended up with over twice as much money due to compound interest. This is the power of compound interest over time. Therefore, start investing as early as possible.

3. To build your passive income portfolio.

   Passive income is money earned with little to no active effort on an ongoing basis. Unlike a traditional job where you trade time for money, passive income allows you to make money while you sleep by leveraging investments, assets, or automated systems.

   Some investments, like dividend stocks and real estate, provide passive income—money earned without actively working. This can supplement your salary and help you build financial freedom. One benefit to investing in the stock market is traditionally it has provided positive returns on investment. Let's look at the last 5 years.

   Let's say you have $100 & you invested that $100 in the S&P 500 Index in 2020 & did absolutely nothing to it. Below was the stock market annual return each year:

2020 +15.8% | 2021 +26.6% | 2022 -19.6% | 2023 +23.8% | 2024 +23.9%

Therefore, let's do the math...

2020 - $100 × 1.158 = $115.80

2021 - $115.80 × 1.266 = $146.44

2022 - $146.44 × 0.804 = $117.68

2023 - $117.68 × 1.238 = $145.73

2024 - $145.73 × 1.239 = $180.53

So, if you had invested $100 in the S&P 500 at the start of 2020 & did absolutely nothing to it but held, your investment would be worth approximately $180.53 today. That's absolutely crazy.

The second of 3 questions: When to invest your savings?

The best time to invest is as early as possible because of the power of compound growth as explained in the earlier example. However, if you’re wondering whether the market is too high or too low right now, the answer is: it doesn’t matter as much as time in the market.

To really demonstrate the power of time let's use another example.

Let’s compare two people: Early Investor Emily and Late Investor Luke.

Both invest in an S&P 500 index fund averaging 10% annual returns, but they start at different times.

Emily (Starts Early, Invests Less)

• Starts investing at age 25

• Invests $300 per month ($3,600 per year)

• Does this for 10 years, then stops at age 35

• Total invested: $36,000

Even though she stops contributing at 35, her money continues growing at 10% annually until she turns 65.

Luke (Starts Late, Invests More)

• Starts investing at age 35

• Invests $600 per month ($7,200 per year)

• Does this for 30 years, until age 65

• Total invested: $216,000

Results at Age 65:

• Emily’s balance: $1.02 million (invested only $36,000)

• Luke’s balance: $684,000 (invested $216,000)

Bottom Line: The best time to invest was yesterday. The second-best time is today.

The third of 3 questions: How to invest your savings?

Let's walk through the different avenues you can invest your money.

1. Stock Market

   The stock market is a great opportunity for investing. Below are three options you can pursue:

   1. Individual Stocks

      An individual stock is like owning a tiny piece of a company. When you buy a stock, you're becoming a part-owner of that business. If the company does well, the stock price goes up, and you can sell it for a profit. If it struggles, the stock price goes down, and you could lose money. It's typically more risk seeking due to reliance on a single company's performance.

      For example, if you buy 1 share of Apple (AAPL) for $180, you now own a small part of Apple. If Apple's stock price rises to $250, you can sell it and make a profit. But if it drops to $150, your investment loses value.

   2. Dividend Stocks

      Dividend stocks are shares of companies that pay a portion of their profits to shareholders in the form of cash or additional shares. Note that not all individual stocks are dividend stocks. A dividend stock is like a company that pays you "thank you" money just for owning its shares. These companies share a portion of their profits with investors on a regular basis (usually every 3 months), kind of like getting a small cash bonus just for holding onto your investment.

      For example, if you own stock in Coca-Cola (KO) and they pay a $1.84 dividend per share per year, owning 10 shares means you'd get $18.40 per year—without doing anything! You can either spend that money or reinvest it to buy more shares and grow your wealth over time.

   3. Index Funds

      Instead of individual stocks which are typically more risk prone, you can look to index funds. An index fund is like a basket of stocks that automatically follows a specific group of companies, such as the S&P 500 (the 500 biggest U.S. companies). Instead of picking individual stocks, you invest in the entire market at once. Therefore, it won't make or break you if a single company does perform well as its performance is based on many companies.

2. Retirement Accounts

   In my last article I wrote about 401k's, Health Savings Account (HSA), Roth IRA's so I won't go into much detail, however, all should be utilized within your investment portfolio.

3. Real Estate

   Real estate is unfamiliar terrain (so far) for yours truly within the world of investing, however, it can be a powerful tool to building wealth. My biggest recommendation if you plan to invest into real estate is starting small so you can learn through making mistakes & repetition.

So, I've outlined why you should invest, when you should invest, & how you should invest. All three are important to understand so you can set yourself up for financial success. I like specifics in life so here are the investing steps I personally like to follow. Please make your own decisions if you disagree. There is not a single "right" way to go about it. Do what works for you.

Note: Before investing, I make sure I'm already doing the following:

1. Paying off IN FULL any high interest debt (i.e. >8%, credit cards)

2. Paying off MINIMUM payment of any low interest debt (i.e. <8%, student loan, car payment)

My Investing Strategy

1. Create my emergency fund in a high yield savings account (3 months of living expenses - My "Needs")

2. Contribute to my Roth 401k to my employer's matching contribution

3. Contribute to my Health Savings Plan (single 2025 max amount - $4300 or $166/bi-weekly paycheck)

4. Contribute to my Roth IRA (single 2025 max amount - $7000 or $270/bi-weekly paycheck)

5. Contribute the remaining to my brokerage account

It's straight forward, easy, & to the point. Once again, find what works for you & be disciplined with the plan!