Today we review JL Collin’s influential book The Simple Path to Wealth. This is a must read for anybody looking to take the low-maintenance road to financial independence. Let’s see why this book deserves a spot in your reading queue.
If you are thinking of taking this FIRE (Financial Independence Retire Early) route, then this is the book for you. If you are on the fence about it, this is still the book for you.
JL Collins gives us the road map to financial independence with his book The Simple Path to Wealth
Simply put, The Simple Path to Wealth is the roadmap for anyone looking to go down the path of FIRE.
If you’re like me, you’ll want to make it way more complicated then it needs to be. You’ll listen to thousands of hours of podcasts and read innumerable blogposts on the matter.
But in the end, it all distills down to what JL Collins has written in his book.
Collins brings logic, humor, leadership and years of experience to the world of financial independence. This carries directly over to the pages of his book.
He gives heaping portions of wisdom and sage advice throughout his writings. Whether you choose to follow the path he lays out is up to you. Either way, you will not regret having read it.
Let’s start by taking a closer look at one of FIRE’s most iconic figures.
About JL Collins
I’ve never met JL Collins in person. Some day I hope to. He’s one state up from me in NH(I live in MA), so maybe it will happen. More likely it would be through an event that he runs called Chautauqua (more on that later).
The point is, everything I know about him is through listening to podcasts and through reading his various works.
From what I have gathered, JL Collins tells it to you straight. He does not sugar coat or mask his feelings in any way shape or form. If he believes in something, he gets behind it 100% and tells you why. If he thinks someone/something is full of sh#!, he’ll tell you that too.
In my mind, he’s got that natural gift of leadership. Lucky for anyone that reads his book, he’s leading you to greener pastures (in my humble opinion). You can’t say that about every leader.
If you choose to master it, money becomes a wonderful servant. If you don’t, it will surely master you.”
JL Collins (The Simple Path to Wealth)
Better still, he’s calling on years of experience in the financial world, and showing you all the pitfalls that so many of us fall into.
He has a genuine disdain for the financial experts that lead us astray. This disdain mixed with his brutal honesty makes for good reading that is both entertaining and incredibly informative.
All told, reading his book, The Simple Path to Wealth, is definitely a worthwhile venture if you are interested in exploring the road to financial independence.
The Idea Behind The Simple Path to Wealth
If you listen to enough of his guest podcasts, you eventually start to hear Collins apologize for his book/blog’s “genesis story”. Nevertheless, it’s an important element to understand and it lends itself well to a teacher’s busy lifestyle.
Collin’s blog, then book, started out with the idea of it being a series of letters to his daughter.
Essentially, he explains that his blog (where all his writing began) is a series of letters to his daughter. Collins wanted his daughter to understand the world of personal finance so that she could avoid the myriad pitfalls that so many of us fall into. Much to his chagrin, she was completely disinterested in the topic, even though she knew of it’s great import.
Basically, despite it’s importance, she didn’t want to sink her whole life into understanding it. Finance felt too high maintenance looking and complex to her. So, she simply passed.
That’s when the light went off for Collins. Just because he found it fascinating, doesn’t mean that others did. He enjoyed getting into the weeds. But he, as he well knew, was anything but “normal” in this regard.
Collins understood. If he wanted his daughter to be financially savvy, it had to be low maintenance. It had to be “simple”. And so the blog letters that would eventually lead to The Simple Path to Wealth were born.
This, as I referenced earlier, is why I think this book is such a great fit for teachers. With so little time to spare, this road gives you the peace of mind that your financial future is being secured without the time commitment that can feel so daunting.
But, in order to follow his lead and invest your hard-earned money, you probably want to have a little bit of trust as well…
Trust
Sometimes, as teachers, we know that our students just have to make the mistakes and learn for themselves.
In the case of Collins, he didn’t want to have his daughter to learn the hard way. It could be too costly.
And there are a lot of sharks in the financial waters. He had learned this through years of experience and hard-earned wisdom.
Collins writes the following in his introduction. “Unfortunately this benign neglect of things financial leaves you open to the charlatans of the financial world. The people who make investing endlessly complex, because if it can be made complex it becomes more profitable for them, more expensive for us, and we are forced into their waiting arms.”
That excerpt gives a feel for Collins’s honesty mixed with his disdain for the “financial experts” that lead us adrift.
His candor and logic lead me to trust him. Then, throw in the fact that he has very little to gain from you following his advice, and the trust only deepens.
In the end, apart from buying his book(s) (which he’ll happily tell you to take out of the library), or visiting his blog, he has very little to gain from these ventures. He recommends Vanguard and VTSAX + VBTLX as your two funds. He does NOT get any income if you choose them.
If he wanted to, he could probably ask you for a fee and invest your money for you. He doesn’t do it. Then, maybe he’d feel just like the people he warns against.
All told, I trust in his leadership and believe his motives are pure. I believe you will too once you read The Simple Path to Wealth.
JL Collins Resources
The Simple Path to Wealth, he explains, is simply a streamlined edition of his blog, jlcollinsnh.com. Give it a look to get a feel for what he’s about. His “stock series” is probably a good place to start.
My library copy of The Simple Path to Wealth
It took me a while to get his book out of the library. It’s still in high demand I suppose… If you want to own it yourself here is an affiliate link that doesn’t cost you anything more, but supports what I’m doing.
You can also search for used versions by clicking my affiliate link at Better World Books. I like their mission of saving books from landfills and using the profits to help promote literacy world-wide.
Finally, JL Collins helps spearhead an event bringing people in FIRE together for a week. It looks fun but it books up fast (fingers crossed for me for anything in the coming years). The event, Chautauqua, can be seen by clicking that link.
The Simple Path to Wealth – In Summary
The book, the path Collins lay out, and my parting words will all have something in common. They are simple.
I said it before and I’ll say it again, The Simple Path to Wealth is the road map you should consider following if you are interested in saving your money and having the potential to retire early. In this blog, I am directing these messages towards teachers because I believe in them. But all my information comes from leaders like JL Collins.
He keeps the path low-maintenance and easy to follow. That way, you can focus on other matters with the knowledge that your financial future is being taken care of.
So, if you want the simple investing ideas from all these blogs, podcasts, and movies boiled down into one place, go get yourself The Simple Path to Wealth, by JL Collins. You won’t regret it.
Thanks for reading everyone. I started my site in February of 2022 after becoming a casualty of the teaching profession. I found myself burnt out with no idea what direction I would go in my career. Then, I found FIRE and wanted to share these ideas with fellow teachers in case they found themselves in a similar situation. Now, I feel much more secure in my future and have a plan I believe in. If you want to come along for the ride I encourage you to subscribe and get posts hand-delivered to your inbox. In the meantime, be well!
Teachers: Why can’t we all achieve financial independence? Answer: We can!
To some teachers, financial independence feels like an abstract idea, unattainable to them. Really though, all teachers can reach financial independence and reap the many rewards for taking that path. Here, we’ll look into how and why you can make this concept a reality for you.
When you were a kid, what was your dream for yourself? What did you dream of becoming?
For me, it was a baseball player and later a basketball player. The fact that I was only passable at each was irrelevant. It’s what I wanted to be.
As a youngster, my dream was to be a professional baseball player.
And Why? Simple. 3 F’s. Fun, fame and fortune.
Baseball players were famous, and baseball players were rich. They also got to play a fun game for their fame and fortune. Those simple facts trickled down to my growing, impressionable brain and took hold.
If you ask your students now, you can get a wide array of responses. Some are incredibly refreshing while others reflect my line of thinking in a modernized way.
“Youtuber” and “Social Media influencer” might be on the newer side of things and could be mixed in with some of the classics like basketball player, actor, or musician.
Kids these days and their social media aspirations!
And if you probed a little deeper, it’s probably safe to say that the words “famous” or “successful” are probably implied with those aforementioned professions.
I want to be a famous basketball player, Youtuber or actor. I want to be a successful musician or social media influencer.
If you have the great fortune of teaching certain age levels that I won’t name, your teaching may be met with varying levels of indifference. Why? Because this fame and success, in the students’ minds, is pre-ordained.
I don’t need to learn this (fill in subject matter), because I’m going to be a famous (fill in the profession).”
What’s lost in all of this are the incredibly long odds for each of them to achieve these levels.
In the NBA, for example, there are about 400 players. I won’t get silly with the math, but with about 7 billion inhabitants on Earth, let’s just say I don’t like your chances.
And if 5 of those kids are purportedly sitting in any given class, then I DEFINITELY don’t like those chances.
But it’s not our job to shatter dreams, so I don’t. Besides, maybe I’m wrong.
However, there is one question I want to ask them and that is this: “Is it such a bad idea for you to have a back-up plan?”
“Just in case your long-shot career move doesn’t work out, it’s probably prudent to have a back-up plan. Let’s make school your back-up plan… Get back to work.”
And that, today, is a message I want to consider in this post. The idea of the back-up plan. For me, and perhaps you, that back-up plan could be this idea of being Financially Independent.
That way we can take control of our own destiny, and not be so reliant on other forces (like pensions for example) to dictate our future.
Financial Independence – A Good Back-Up Plan
Last year I burnt out teaching. I didn’t think it would happen to me. I really didn’t. But, given some of my prior money habits that were favorable, I had a de facto back-up plan baked in.
Between then and now I have done a deep dive into this concept of personal finance, and my ideas have hopefully evolved. This is partly why I write. I want to share what I have learned with the hopes that it can positively impact your life as it has for me…
A lot can change in education!
So, even if you are reading this and your job is going great and you love it, it seems to me, in my 12 years on the job, that there are no guarantees it will continue this way.
Principals move on. Students and parents change every year. Superintendents switch districts on the regular. Education, in general, is constantly morphing.
Enter the back-up plan.
Saving your money and growing it, can, in essence, be a back-up plan in case you ever find yourself burnt out (or in some other extenuating circumstance).
And, by the way, I freely admit that I had other factors at play (fixer upper house, baby, etc.). It wasn’t all the job.
But in the same breath I’ll say that the rates of teacher burnout are going up, not down, across the country. So, I know I’m not alone.
And while my favorable personal finance habits weren’t meant to be a back-up plan per se, I was so glad that I had them in place so that I could take this year and regroup.
As I write to you today, my future is still uncertain, and I’m planning to head back into the field. However, I am doing so with a new outlook.
For starters, I knocked out a HUGE chunk of that daunting house work. It will always be there in some capacity, but I feel very pleased with what I’ve accomplished.
In addition, given my research into Financial Independence, I now predict that I only have to work 5-9 more years, instead of the 18 years I assumed I needed to reach full pension.
Thanks to personal finance, this year has been good to me.
That alone, has been so reassuring to me. I don’t even know that I can do it justice with words.
This psychology, of knowing that I’m taking care of my future self, is worth more to me than anything I could purchase.
I want you to have that reassurance as well. You have, in my humble opinion, the most important jobs there are. If you feel taken care of and reassured, it could take some stress off your plate and allow you to focus those energies to the important work that you do.
This is another reason I write.
So, in the same breath that I ask myself “Why can’t I be financially independent?” I also ask you, “Why not you?”
Answers will obviously vary, based on varying starting points, but perhaps the knowledge that you are taking those steps and creating a viable safety net or back-up plan for yourself, is well worth the potential spending “sacrifices” you make today.
Believe me when I tell you, it absolutely was for me! And if your line of thinking runs parallel to mine, then what are we waiting for? The steps, as I see them, are right there for the taking.
As soon as we allow for the fact that this plan can take many years, then the psychology behind it becomes much easier to accept.
But if your original plan was a 30-year pension then it doesn’t look so bad all of the sudden.
This post, “What Does a Millionaire Actually Look Like?“, has a table in it that lays out a pretty reasonable yearly savings goal that can get you to $1,000,000 in 20 years.
Personally, I want about half of that ($500,000) so my numbers look even more favorable and I’m hoping I’ll be closer to 5 more years to reach Financial Independence.
Let’s quickly look at what Financial Independence is, then explore the steps that I’m taking to go down that path.
What is Financial Independence (FI)?
Financial Independence can be a very helpful goal to work towards.
Simply put, financial independence, as I see it, is reaching a level of savings where you no longer have to work for money.
In most cases this involves investing (and it certainly does for me).
Basically though, with your invested savings, you can live off the interest your savings provide for you, and/or your savings themselves.
In all of these calculations, I factor in an 8% rate of return from investments because that is what the market has averaged over time.
Example: Basically, if I reach my FI number of $500,000 then, in theory, I would be making, on average, 8% from the market per year. Eight percent of $500,000 is $40,000.
Then, when I’m 55, I could start collecting my meager pension. Mine might be close to $20 – 25% of my salary by then. Let’s call it $15,000.
In addition, because I have free time, I would have the option to earn some money on the side, if need be. Could I cook up a plan to make $10,000 per year on the side? Probably, though I recognize it’s harder than it looks.
Finally, as a back-up, don’t forget that you have the $500,000 itself that you could dip into if need be.
Put it all together and, in theory, you are making $65,000 per year ($40k from interest off investments, $15k from pension, and $10k from side hustle). If your financial needs are below that number, as mine are, than you have reached financial independence!
You are no longer beholden to a paycheck and free to dictate how you spend your precious “non-renewable resource” of time!
And as I write this, I come to an important realization. Perhaps my FI number is too high? Maybe I don’t need $500,000 saved… I think my break even amount for the year is about $25,000. $65,000 so far exceeds that, and is giving me pause… Over this past year of research, my FI number has gradually dropped. Perhaps it’s time for another tweak? Stay tuned on that one…
Either way, I’m not there now, so there is time to investigate it as I get closer to that point…
For now, however, if this is as invigorating for you, as it is for me, then let’s look at the plan, or steps, I’m following to get there. I believe that I am on my way and I ask again, “Why not you?”
Steps to Financial Independence
The steps to FI (financial independence) aren’t as daunting as you might suspect.
Here seems like a good spot to slap down a disclaimer. It’s the world we live in right? But very truthfully, I maintain, as I do in nearly every post, that I am NOT a financial expert. I’m only writing my plan for my own money, and what you do with yours is entirely up to you.
The only thing I’ll add to that is that I will never ask you for a dime, and that the general financial outline I follow are gathered from people that I trust in the field of finance.
For a post that references some of these people, AND a deeper look into the world of FIRE (Financial Independence Retire Early), check out this post entitled “FIRE, Hope and Early Retirement“.
Moving on, the steps I am about to lay out for FI, are pretty simple in nature. But remember that there has to be an underlying understanding that they take many years to reach.
Nevertheless, you have to start somewhere, AND, more importantly, they really don’t feel like much of a sacrifice. If anything, I feel so much happier/relieved knowing I’ve set a course that I believe in, rather than filling holes with expensive material goods (as I’ve done in the past).
Step 1 – Improve your Savings Rate: This is the foundation for which all of the other steps are built upon. If you can build your savings rate, you are spending less. If you spend less, than you need less money to live off of. If you need less money, then your FI number lowers. If your FI number lowers you can retire earlier.
So, like I said, this is a big one.
For your reading pleasure, I have created a bunch of posts on this subject matter. Here, I’ll highlight two of them:
If you are interested in even more options on saving money, click here and it will take you to the “saving money” page where all of those posts live.
Step 2 – Get out of “Vicious Debt”
By “vicious” I mostly mean “credit card debt.” Debts like these carry massive APRs that approach or exceed 20%. If I’m expecting an 8% return on my investing then losing over 20% is 2.5X of that in the wrong direction.
Clear that stuff up.
Knock out that credit card debt to accelerate your savings!
The positive spin is that you can think of it as investing. You are getting over 20% return (or whatever your APR is) on your investment. That’s crushing it!
And once you wipe that stuff out you can investigate other debts that may be high as well. Can you consolidate? Are there ways to bring that percentage into a much more manageable range?
Doing these steps can save you many thousands of dollars per year that we are giving away for nothing.
Wipe out the high-yield debt before moving on to next steps. The one exception, you could argue might be this idea of an emergency fund. (But for me, I’d still rather get rid of the debt first).
Step 3 – Set up an Emergency Fund. Like I said before, you may want to do this during or before you go after your debt. Whatever gives you piece of mind really.
Nevertheless, because your savings rate is so much higher, we can knock this step out relatively quickly.
Basically, you want to establish some money for when life throws you a curveball. That way you don’t have to go back into that crushing debt you just got back out of.
For a much more detailed look, check out this post I wrote entitled “Emergency Fund Know-How“.
One big advantage to this emergency fund is so that you don’t have to accumulate the aforementioned crushing debt. That’s why I like this as step 3.
Step 4 – Begin Investingand keep on Investing!
Investing can take years off your Financial Independence number!
There are no guarantees in this world, however, given the history of the market (and that it has always trended up over time) and given the alternative (that if I don’t invest I will definitely have to work 20 more years) this is a non-negotiable step for me.
Basically, I want to tap into that 8% annual growth. This will double my money every 9 years or so and take years off of my expected work time.
This can be a very daunting step for many, but based on my research, it really doesn’t have to be.
I also have an investing page of my site that has other related posts as well.
The bottom line is that if you want your money working for you, you probably need to invest it somehow. For me, I’m following the very simple strategy laid out by others, including Warren Buffet, and letting time do it’s work.
That last part is a great lead into the last step.
Step 5 –Allow time to do it’s thing!
Give it all time and enjoy the ride as you do!
With your savings rate elevated and your money invested, the math becomes more and more in your favor over time.
So, as I’m learning to do myself, and in the words of other FI people before me:
“Be patient and enjoy the ride.”
When, you finally reach your FI number, you can make a decision that is best for you. And if you’re anything like me, you won’t regret having had this “back-up plan” in place even if you do decide to keep teaching.
Other Benefits – Job Risk, Environment and More!
Here are some other benefits, I see them, to taking the path to financial independence (FI).
Take Healthy Risks – If we’re calling a spade a spade, then for many of us in the teaching world, the idea of “tenure” is a security blanket.
In reality, because we’re very good at what we do, we don’t actually need it per se. “They’d be fools to fire us…”
Nevertheless, it’s a reassurance once you get it. Reassurance because who knows what can happen right?
FI can reduce stress and allow you to take professional risks as well.
But that same security blanket can also be a governor or inhibitor of sorts as well. Maybe you see a more attractive position in another district but you don’t apply for it because you don’t want to give up your tenure.
Or, maybe you don’t take a healthy teaching risk because it goes against some new initiative your school/administration is rolling out.
All that goes away with Financial Independence. So, if you want to continue teaching, you can do it on your terms and take those risks that you deem necessary to improve your life or the lives of your students.
Sort of a ,”If they fire me, I’ll just ride off into the sunset,” way of thinking.
This sounds very liberating, and my guess is, that once you take those chances and receive appropriate accolades for them, you’ll wonder why you didn’t start sooner!
FI can allow you to take those risks. This ties nicely into another potential benefit.
Drastically Reduce Stress!
There is something about having a plan that I find very reassuring. Now, instead of feeling somewhat rudderless and buying things because “what else am I going to do with this extra money?”, I have a direction and a plan for it.
On top of that, I also feel reassured that I am taking care of my future self. No longer am I beholden to a “full pension” to care for me in my wearied, battered state after 30+years of teaching (that’s where I’d be, but may not apply to you!).
Now I have a FI number that I can aim for, and a plan to get there.
Knowing my direction and that I’ll be taken care of have drastically reduced my “long-term stress”.
If you’re deciding whether to take this path, ask yourself if it would have the same effect on you as well. And is it worth it to you?
For me, it absolutely is!
Environment – Reduce Waste and Energy Expenditure
Being financially independent can help preserve the environment as well!
There are all sorts of stats out there about what percentage of the stuff we buy ends up in a landfill after the first year (hint: it’s high and it’s alarming).
But really, my outlook on it is a little more long term. Basically, I think, “It’s all going to end up as trash at some point.”
Whether it’s this year or in 15 years, or even 100, the stuff we buy becomes trash. So, if you are on a path to financial independence and consequently saving much more of your money, then you are most likely buying less stuff.
Whether it’s intentional or just a helpful byproduct, you are buying less materials and creating the demand for less of it to be made. This leads to less trash.
It also leads reduces clutter! Clutter subconsciously sucks your energy and I want no part of it. But the unfortunate reality (at least for me!) is that it is much harder to get rid of something than it is to never bring it in.
Now, with this new plan I just reject it outright and am much happier for it!
Lastly, if you are saving money, you are also finding ways to reduce utilities or travel expenses. All this amounts to less energy that needs to be created. This, in turn, is also better for our environment.
More Time!
In the FI world the refrain “time is your most precious, non-renewable resource,” comes up time and again.
Both, the journey to FI, and reaching FI can free up your precious time.
I’m on board with that line of thinking and it’s why I’m heading down this path. I want the option to spend my precious, precious time the way I deem fit.
And certainly, with a noble cause such as teaching, that is time well spent.
Nevertheless, it has exacted a toll on me and I want the option dictate how I spend my time, should the need arise again.
I’m currently reading Your Money or Your Life? by Vicki Robin. She is a pioneer of the FI community and wrote the book in 1992.
I’m going to do a post on it soon and will put it here shortly.
In that book she puts forth a number of thought-provoking questions/ideas to ponder. One of the questions is the following…
If you didn’t have to work for a living, what would you do with your time?
My answer? Well, certainly I’d like to think that I would still teach in some capacity, but I also know what I would NOT do.
I would not exchange emails with parents explaining whether or not their child is/is not getting enough homework (depending on the parent).
I would not write report cards that take me very long hours, and are barely read.
I would not go to staff meetings to learn about new initiatives or take “5-minute surveys” from the district that dictate my future.
I would not… pause… Oh boy, I’m starting to get revved up here! I’ve been avoiding it, but it’s time… Stay tuned for a “Why I Burnt Out Teaching” Post.
For now, let’s just say that I don’t find all parts of my teaching career to be “fulfilling.”
Getting back to the question, maybe you can see why, for me, the answer is not as simple as “teaching is fulfilling, therefore I would teach.”
And getting back to the original idea of more free time, there are a few forces at play. First, because you are consuming less, you are spending less time consuming. You are shopping less, browsing online less, taking less things to the store to be fixed, etc. As a result you have more free time in the present.
The other, more obvious one, is that because you can retire early you would obviously free up A LOT more time to use as you deem fit.
So, if the idea of more time is enticing, because it is so valuable, then this might be a path for you as well.
In Summary
Achieving Financial Independence is absolutely a path that all of us can take if we choose. It’s not reserved for a select few.
It’s also a reassuring back-up plan that has helpful byproducts of reducing stress, helping the environment, freeing up time, and allowing you to take healthy risks in your career.
By improving your savings rate, you can clear debt and build an emergency fund. Continuing on, this same improved savings rate will fuel your investments and reduce your time to Financial Independence exponentially.
For all of these reasons, I have chosen to take the path to FI, and getting there becomes a math equation.
Does this sound like something for you as well? If so, what are you waiting for?
Thank you for reading everyone! If you feel inspired to write in the comments below, I’d love to hear your thoughts? Where are you on your path to FI? Or, what is holding you up? If you have questions/thoughts, feel free to put them below or reach out and contact me independently.
How much does our mental image of a millionaire match reality?
In reality, there is no one look for a millionaire. Logically, we understand this. However, the word does conjure an image doesn’t it? Taking a deeper look into this idea of a millionaire can be an eye opening exercise, that can ultimately inform how we manage and use our own money moving forward.Let us Investigate…
Okay, let’s be quick about this. Put the image of a millionaire in your head and hold it. What pops in right away?
Typically, I have a financial system that I run for my students throughout the year, and we do this exercise at some point in the first month or so.
If you are like me or my students, a certain image popped into your head at the mention of the word “millionaire”.
For us, typically it’s something lavish, perhaps involving yachts, clear blue water, and people sunbathing on the deck with their fancy sunglasses.
But then, shortly after, I override that image and come up with a completely different one.
My new image, I believe, is much closer to reality. Let’s take a look and figure out how it came to be. Then we’ll see what take-aways, if any, we can collect from the exercise…
The Stereotypical Image of a Millionaire
When I do the aforementioned exercise of envisioning a millionaire with my class, two things become abundantly clear. First off, the reality of our image is that the person that lives such a lavish lifestyle is WAY richer than a millionaire.
A million dollars doesn’t carry the same weight these days…
Being a millionaire these days, isn’t nearly as impressive. This is partly because the value of the dollar has gone down due to inflation. Having a million today just doesn’t have the same worth.
According to this inflation calculator I quickly found, $1,000,000 is the equivalent about $10,000,000 in 1989 when I was a young impressionable 10-year-old. Wow! That’s a 10X devaluation of the dollar in 23 years!
Another reason a million dollars isn’t quite as impressive is the fact that we are living in the age of information. Nowadays, we frequently hear about billionaires (1 billion is one thousand millions!) and the massive business transactions they make. This further demystifies the concept of a millionaire.
Still, despite all of this, the term millionaire still has weight to it. Which is why I’m using it in this post.
Getting back to our example, there is a good chance that a person living a lavish lifestyle spends like a millionaire, but isn’t actually a millionaire.
We see this a lot. People are constantly trying to “keep up with the Joneses”. Other people in their lives have all the latest and greatest, be it technology, cars, fashion, housing, etc. They want a piece of it too.
And while they can technically afford all of these things, it comes at a price. Most likely, by spending exorbitantly, they are foregoing their future savings. They are probably also adding many years to the time they need to go to work.
Personally, I would much rather have the precious commodities of “time” and “choice”. With the financial decisions I make today, I can get to a point where I have the choice to step away from work and use my time in a way I deem best.
Let me choose how I spend my time…
And truthfully, I do NOT think I am sacrificing any happiness in the process. That’s the part that makes this fit so well for me. In fact, the knowledge that I am securing my future gives me peace of mind, reduces stress, and probably makes me happier.
If you are interested, I wrote a post on the danger of YOLO (You Only Live Once) purchases and why we do them. It digs a little deeper into what we are talking about here and gives practical ideas on how to alter this way of thinking.
I’ll never forget a conversation I had with my parents after driving away from a house of one of their friends. I was probably 10 or 11 and I was definitely beginning to notice symbols of status around me. Noticing the luxury automobiles that others were driving was a favorite past time of mine.
At any rate, this house that we had just finished visiting checked all the boxes for me. First off, it was massive. Secondly, it was incredibly elaborate and everything was new. Third, it had a game room filled with all sorts of arcade games and pinball machines. Finally, and perhaps most importantly, it had two luxury automobiles, a Jaguar and a Mercedes, in the driveway.
Okay, maybe their house wasn’t this nice, but it was still impressive!
I was impressed!
“Wow!” I probably proclaimed to my parents as we were driving away. “They are so rich! They must be millionaires!”
I remember my mother looking back from the passenger seat at me and calmly stating something along the lines of “Actually, no. They are not rich. They are currently having a lot of trouble right now with money… They may have to move soon.”
This just about broke my brain. These people had everything and here my mother was telling me that they were in financial straits? It didn’t compute and it probably showed by the look of confusion I was wearing.
Each chiming in, both my parents continued. They explained that one of the two had recently lost their job. More importantly, they explained that the family was living well above their means and spent every nickel they got.
That meant, when life threw them a curveball, as it is wont to do, they didn’t have the resources in place to absorb that impact. Now, they were left scrambling to get out of their credit card debt, pay their bills, and hang on, by a thread, to whatever belongings they could.
This had a huge impact on me and I wonder if my parents even remember it…
And just to be clear, my parents did not typically talk about the finances of others. Like a good teacher, they saw that teachable moment before them and chose to break that one code for the benefit of their child.
Learning they were in financial straits was eye opening for me!
I’m sure they missed some moments along the way as we all do, but that one they absolutely nailed.
And getting back to the point, these folks were spending like millionaires, but it came with a very heavy cost.
Now we’ve discussed this image of a millionaire that pops into our heads. We’ve also compared it to someone who simply spends like a millionaire. Moving on, let’s investigate what I believe a millionaire actually looks like!
What Does a Millionaire Actually Look Like?
0nce I override my initial image, a completely different one takes its place.
The new image is that person wearing a care-worn jacket they first purchased in the 70’s, driving around in an old Corolla that has well over 200,000 miles and is happily making their coffee from grounds that come in a bucket.
This is closer to the car my millionaire drives!
Why do I come up with this image you ask?
It’s because that’s what I believe is closer to the truth for most millionaires. In order to accumulate wealth, most people have to be careful with their money. They string together thoughtful financial decisions, one after the other.
Over time, these seemingly trivial decisions can add up to huge amounts.
Then, by the time they actually do have this accumulated wealth, their habits are so deeply engrained, that they opt not to partake in the lavish lifestyles we sometimes envision.
For an insight on how to establish positive habits in your own life, read this review I did on the book Atomic Habits.
This is why they still wear their coat from the 70’s. “It still works fine. Why change it?” they reason.
This is why, they drive the old Corolla with 200,000+ miles on it. “It still gets from A to B, with no trouble. Why mess with success?”
In the meantime, the average person has gone through 10 jackets, and is on their 4th car in the same amount of time.
The differences in spending can accumulate quickly.
People are naturally skeptical that these concepts can result in becoming a millionaire, but the math doesn’t lie. If you spend thoughtfully, invest wisely, and give it time to do it’s work, you can be a millionaire many times over.
I’ll say this many times in these posts, and I’ll say it here as well. I am NOT a financial expert in any way shape or form. I’m just a teacher from a family of simple investors and have a newly reinvigorated appreciation for the profound impact these ideas can have on our financial outlooks.
On this site, I tell you my plan for my own money, but you should only do what you think is right for your money.
Now that that disclaimer is out of the way, let’s take a quick peak at the math of it all.
The Math of Becoming a Millionaire
You know how the conditions for creating diamonds is something like, heat, extreme pressure and lots of time?
I think the millionaire formula is similar. Saving, investing and time are the three key ingredients as I see them.
Thankfully, accumulating wealth is a little less time-consuming than creating diamonds.
In other words, if you save well, invest wisely, and give it time to do its magic, you can become a millionaire in less time than you might suspect.
Personally, I have no designs or aspirations to become a millionaire. I just want to reach Financial Independence. When I get to a certain total of savings (TBD, but probably somewhere in the $500,000 range) I plan to live off the interest it provides from investing AND whatever meager pension I receive. I can also dip into the savings I’ve accumulated if need be.
But “millionaire” has more cache! So let’s take a look at what it would take to become a millionaire. Below I am going to create a table showing how much you would need to save/invest each year in order to become a millionaire in a fixed amount of time. I’ll start at 5 years (which should be completely unrealistic) and keep adding increments of 5 years until it looks entirely realistic.
To do this, I’ll assume the 8% market return that the market has returned since it’s conception. Then, I’ll just plug the numbers into this compound interest calculator that I like from Nerdwallet. That way I can show you much was actually was actually invested (principal) vs. how much was earned via interest.
Spoiler alert: The impact of the interest will be more pronounced over time.
Here’s the table. It calculates how much money needs to be invested per year in order to become a millionaire in a fixed amount of time ( in increments of 5 years).
Take a look and then we’ll process it together. What jumps out at you?
Years to become millionaire
Total invested per year
Total principal
Total Interest
5
$157,850
$789,350
$210,924
10
$63,950
$639,600
$361,145
15
$34,100
$511,600
$488,676
20
$20,250
$405,100
$596,181
25
$12,100
$302,600
$699,294
30
$7,750
$232,600
$773,419
35
$5,050
$176,850
$832,685
40
$3,300
$132,100
$872,723
Calculation of how much money needs to be invested per year to become a millionaire in a fixed time.
Processing the Millionaire Table
At first blush, the first two rows feel completely unrealistic on a teacher’s salary.
This makes sense, because you are trying to achieve this high figure in a short amount of time. That means you have to add a lot each year, and it doesn’t give the ever-magical compounding interest time to take effect.
Around Row 3, however, things start to get interesting really quickly…
Making that million might be a little less difficult than we think.
Now, all of the sudden, 15 years from now, you are telling me I can be a millionaire if I put away $34,000 per year?
Sure, that’s still a tall order, but it’s not altogether impossible. I’ve read examples of people saving 70 – 80% of their income. 70% of my own income, where I stand now, gets me above that number if I play everything right. Especially if I max out my pretax accounts (403b, 457, and HSAs are examples of this).
Mind you, I do not want to live that lifestyle. That is too much of a strain. If you’ve read my post called “Improve Your Savings Rate Drastically“, you know that I’m aiming for a much more comfortable savings rate of 40%. While we’re on it, give that post a look if you are interested in seeing the massive, life-changing difference between even a 40% savings rate vs. a typical savings rate that is conventionally recommended.
40% is my target savings rate.
One more benefit uncovered in that post is the idea that if you are increasing your savings rate, you are spending less. And if you are spending less, you need less to get by. And if you need less to get by, you can retire earlier! See how that works for you many ways?
Getting back to the table, there is good news for me. I don’t even feel the need to become a millionaire. My Financial Independence number is about half of a million (the way I see it now). My plan is to live off of the interest of my investments, plus my pension and the actual savings if need be.
So, given that fact, I only need to save half of that amount (about $17,000) over 15 years I’m quite content. Now, we’re really talking!
And as we continue down that table we see the yearly total invested go down. This is for the obvious reason that it’s spread out over more years so you would have to invest less per year.
But the potentially less obvious reason is that the amount of interest we are accumulating is going up. That is because, through the magic of compounding interest, our investment, given time to work, is building on itself.
The longer you give it to work, the more interest you accumulate (always assuming the market continues to go up).
By the time you get to 40 years, you have only actually put in approximately $132,100. The rest is interest!
And if you are looking at the table feeling daunted by the amount of time, remember that the conventional wisdom for teaching is that you stay in for 30 years to collect your full pension.
After burning out last year, I took that off the table for myself. I’m 12 years in at the time of writing this and I estimate that 5-9 more years to retire (vs 18 more years to get to 30) is well within reach. That is far less daunting to me!
If you are interested in learning about this “magical” concept of compounding interest and how to put it to work for you, I wrote a post entitled “Teacher’s Pet – Compounding Interest” for your consideration…
Now, let’s put a bow on this one and bring it all together.
In Summary
To review, we’ve seen that, due to inflation, being a millionaire these days doesn’t have the same gravitas because the value of the dollar has gone down considerably.
We’ve also explored the difference between actual millionaires and people that spend like millionaires. In the case of the latter, and the friends of my family, spending like a millionaire can not only put you in a tight spot in the present, but it can also add many years to your mandatory work sentence.
Next, we looked at what my new image of a millionaire is. This is a person that has built the habit of spending sparingly and saving consistently. Over time, especially if buoyed by investing, these small daily wins can add up to huge totals in the long run.
Lastly, we looked at the math of becoming a millionaire, and it appeared far less daunting than most folks might imagine.
In the end, we all make decisions that are best for us. My general premise is that I hope to learn to forego some of the creature comforts now, invest wisely, and take care of my future self down the road.
Having the option to access time and have agency (to use an educational buzz word) in the process, are of great value to me and well worth any short-term “sacrifices” I make today.
I know I’ve given you a lot of links today (no pressure!) but I would be remiss if I didn’t add one on investing. This post, “Investing Basics Made Very Simple“, gives insight in how I plan to invest in an easily accessible manner. Give it a look if you are intrigued by this concept and are looking for an inroad.
As always, thank you all for reading. Do any of you have a vision of a millionaire that you want to put in the comments below? Any other thoughts? All ideas are welcome (within reason!). Also, please feel free to reach out and contact me any time!
Once you compare them, mutual funds, index funds and ETFs are relatively easy to understand.
When you are new to investing, terms like “Mutual Funds”, “Index Funds”, and “ETFs” can be confusing. You hear them a lot, they sound important, and you may feel like you are on the outside looking in. The goal of this post is to clarify what each of these is and clarify how they might apply to you as an investor.
When I was a kid, it seemed like I couldn’t walk three steps without tripping over the term “mutual fund.”
“Mutual fund this…” and “mutual fund that” my father was always professing to anyone willing to lend an ear.
I was unwilling.
Nevertheless, one byproduct of absorbing this term repeatedly throughout the years was that it took on an almost mythical aura. It seemed like a secret world, that to access, you needed some magical password or key.
When I was younger, mutual funds took on an almost mythical aura!
“Mutual funds must unlock the answers to all of the world’s problems,” I probably mused.
You get the idea. They seemed like a really big deal that were out of my reach.
The truth of the matter is that they are really quite simple to understand. And once you understand what they are, it might demystify this whole process of investing a little bit as well.
The same can be said for index funds and ETFs. Once you understand the general concept, they can become far less intimidating.
So let’s have a look at mutual funds, index funds and ETFs. If, at the end, you still have questions, then throw them my way in the comments and I’ll happily look into it for you (that offer stands for any questions you have btw).
What Exactly is a Mutual Fund?
To understand mutual funds, it helps to have a grasp on the concept of a stock.
A stock is basically a very small piece of a company that you can buy and own. Essentially, when you buy a stock you become a part-owner of that company. An owner that has no say in anything at all, but an owner nonetheless.
Buying a stock is like saying, “I like the direction of your company and I want in!”
And for our purposes, you can only buy stock in companies that are “publicly traded”. This means that they are available for purchase by anyone in the stock market.
So, once you have this understanding, then figuring out mutual funds becomes a little less complex.
A mutual fund, for our purposes, is simply a collection of stocks assembled together in one group (or fund).
To be fair, mutual funds can also have bonds, or other assets as well, in addition to stocks…
Think of a mutual fund as a bucket filled with stocks, bonds and other assets together.
But really, if you think of a bucket, and you fill it with a bunch of different stocks, and perhaps some bonds or other assets, whatever is in that bucket, is the mutual fund.
Then, when you purchase that mutual fund for your own portfolio, you are buying small chunks of everything that is in that bucket in one simple purchase.
Part of the allure is that the mutual fund takes all the work and research out of it for you. You have a team of investors putting together this perfect blend (or bucket) of stocks that you can buy in one neat little package.
Who Decides What Goes in the Bucket?
Usually, an investment firm, will have a team of investors that collaborate on an individual mutual fund.
For this, I think of it like they are trying to make an award winning chili (for example). If they get all the ingredients just right, then this chili will be irresistible. The judges will take note, the people will want the chili, it will garner huge accolades and the chili will thrive.
Fund managers are trying to find that perfect blend of ingredients in their mutual fund, much like a chili.
Applying this to a mutual fund, the fund managers, are trying to assemble a wonderful collection of assets in this one pot so that the fund thrives and the people buy it.
As the market fluctuates, these managers can add or subtract assets in their mutual fund, with the idea being that they are constantly positioning the fund to succeed, making it more enticing to investors.
How Expensive are these Mutual Funds?
When you purchase a mutual fund, the investment firm you bought it from is able to collect a small fee known as the expense ratio. If many people buy this fund, then they get many small fees which add up to large profits for the investment firm.
Expense ratios can vary from fund to fund. They can be as low as 0% and can be seen as high as 2% (or even higher). While 2% doesn’t sound like much, it can be the difference of hundreds of thousands of dollars over many years.
To illustrate the significance of these expense ratios I have copied and pasted a table I made from my “Investing Basics Made Very Simple” (link below in next paragraph) post. In the table you will see how much a fund costs over 30 years, investing $10,000 per year at an 8% rate of return.
Expense Ratio
Cost of Expense Ratio
.05%
$13, 114
.25%
$64,178
.5%
$124,992
1%
$237,232
1.5%
$338,049
2%
$438,633
This table shows the cost of various expense ratios over 30 years investing $10k per year with a market return of 8%.
As you can see, those high expense ratios add up to massive amounts over time. This is all money you could be keeping for yourself (for the most part)!
For this reason, I’m on board with the advice I read about from people I respect. For my money, I’m investing in mutual funds with very low fees. If you’re interested, here is a post called Investing Basics Made Simple, that goes into the details on how I choose to invest my money.
So, what are these low-fee mutual funds that I speak of? Well, for starters, they are usually not actively managed funds like the ones described above. Investment managers cost money and I’m sure their pay is not cheap. These fund managers are in charge of cooking up this perfect recipe of funds and constantly adjusting it to move with the fluctuating market. All of this costs money and it usually comes at an expense to the investor in the form of an expense ratio.
So, for my money, I try to avoid those fees by investing in index funds.
What’s An Index Fund?
For starters, an index fund is a type of mutual fund.
But, an index fund is automated rather than actively managed. It is designed to “follow” a particular “index”.
An example of an index is the S&P 500 index. For the most part these are the top 500 publicly traded companies in the country (Amazon, Google, Facebook (Now Meta) and so on.).
An S&P 500 index fund would simply have all 500 of the stocks in the S&P 500.
Google is one such company found in the S&P 500 index.
As you can see, there is no real thinking or “managing” involved. If a company drops out of the top 500 the fund sells it and buys the new one that took its place. Simple. Automated. Clean. Inexpensive.
And because this S&P 500 index fund doesn’t have those expensive human fund managers, it keeps the costs very low (much, much closer to 0%).
In addition, index funds typically outperform somewhere near 80 – 90% of all actively managed funds.
The end result is that it’s far less expensive AND it’s much more likely to do well. Sign me up for that!
Their are plenty of other index funds out there that track various indexes (indices? ). Some do better than others, but for the most part, all of them have very low fees.
Personally, based on the advice found in the Financial Indepence community, I gravitate to “total market index funds.” These funds buy EVERY publicly traded company in the United States. So, in essence, by buying these funds I am owning an infinitesimally small portion of every publicly traded US company.
I’m also indirectly betting on the US economy. This is a good bet according to Warren Buffet. Who am I to argue?
If you are interested, I wrote a post on 3 total market index funds, that I bought on the exact same day so I could compare them to one another in a horse race of sorts. It is aptly named Total Market Index Fund Horse Race. I found the results to be interesting and I hope you agree!
Also, FYI, Vanguard is widely considered to be the best index fund company in the game. And rightfully so! Their founder, Jack Bogle, invented the darn things with the idea that the individual investor should thrive in lieu of the investment firm.
I have an account with Vanguard and plan to open a 403b with them when I get back to work.
So now that we know that an index fund is essentially an inexpensive mutual fund run by a computer instead of a team of humans, let’s figure out what the heck this ETF thing is!
What’s an ETF?
My best explanation of an ETF (Exchange Traded Fund) is this:
An ETF is an index fund that is sold like a stock.
Basically, when you buy or sell mutual funds (a group which includes index funds) you do so after the market has closed for the day. If the market were to surge up until noon and then plummet down until its close at 4pm EST, it would NOT really matter when you clicked “buy” during that very tumultuous day.
You would just buy the fund at the price it was at closing (at 4pm EST).
But, for an ETF, that huge fluctuation would matter! For an ETF you are purchasing that fund at the specific time you click “buy”. So if you buy after the market dips down, and then it suddenly surges up, you’ve already made a little money that day! The reverse is also true. This is similar to how stocks are bought and sold.
An ETF is just like an index fund except you can buy it like a stock and often times expenses are lower.
Like a typical mutual fund, it is still a collection, or bucket, of assets.
Unlike a typical mutual fund it can be bought instantly and is instantly at the mercy of whatever the market does for the rest of that day and beyond.
Personally, I don’t have a lot of ETFS. I’m a long term investor so I don’t anticipate having the need to buy or sell from one minute to the next. I just set it and forget it.
That’s not to say there is anything wrong with them. If chosen correctly, they are a perfectly fine investment. For example, VTSAX, which is Vanguards “total market index fund” also has an ETF equivalent called VTI.
These are, by my eyes, and from what I’ve read, the exact same thing. They are both total market index funds. VTI, however, can be bought and sold like a stock.
I also see, that VTI has an ever-so-slightly lower expense ratio (.03% vs .04%). So, by those metrics, VTI might be the slightly better option (by the thinnest of margins). Remember, I am not a financial expert in any way shape or form! I am but a humble teacher. Humble like a fox! (That makes no sense.)
But realistically, for the long term investor, if one of these total market index funds is of interest to you, then either is probably a fine choice.
In Summary
So there you have it! There’s your explanation for mutual funds, index funds and ETFs.
A mutual fund is a bucket filled with many assets, including stocks, bonds and more, that are grouped together and sold as one fund.
Many of these are actively managed and have higher expense ratios associated with them.
Index funds, on the other hand, are still mutual funds but are not actively managed. They are automated and set to follow a specific index in the market (like the S&P 500 index). Because they are passively managed, they have much lower expense ratios.
They also outperform between 80% and 90% of actively managed mutual funds.
Meanwhile, an ETF (Exchange Traded Fund) is like an index fund that can be bought and sold like a stock. In general, the expenses for these appear to be slightly lower than the equivalent index fund.
For my money, I choose to follow the advice of many in the Financial Independence Community (Here’s a post I wrote on the FIRE (Financial Independence Retire Early) movement and its profound impact on me) and I buy low-fee index funds and ETFs like VTSAX or VTI.
Finally, if you are interested in a way to dabble in the investing world to see if it’s a fit for you without putting too much on the line (it could be as low as $1), here’s a post I wrote called the Dip Your Toes Investing Strategy for Beginners.
That’s all for now! I hope that was a helpful clarification of mutual funds, index funds, and ETFs and that it demystified it for you a bit as well. If you have any questions on this or anything else that you want me to look into, don’t hesitate to ask below in the comments or contact me any time!
Fear of dangers lurking can prevent us from accessing potential long-term investing gains.
If you are a beginner, there can be a lot of fear and uncertainty around investing. Fears of “market crashes” and “losing it all” run rampant. Usually, after investing for a while and seeing that you didn’t in fact “lose it all” (you probably actually gained) the fear subsides and you gain trust in the process. The strategy I propose today allows you to dip your toes in the water, gain the trust in the process, and decide whether investing is for you. And all this without putting anything overly consequential on the line…
Have any of you ever seen the movie Jaws? It’s an absolute classic and I enjoy it thoroughly. From ages 8 through 25, as a tradition, I watched it every summer when we would meet in New Hampshire for my mother’s anesthesia class reunion. It was a very small class and we would all stay together in the home of one of her classmates.
They graduated in 1975 which is the same year that Jaws was released, hence the tradition.
Good times.
One lingering byproduct of watching Jaws from age 8 thru 25 is that I am irrationally terrified of swimming in the ocean. Normally, I love to swim and always have. But I can think of many times when I opted not to, for fear that a 25-foot Great White Shark would gobble me whole.
As a result, I mostly stick to ponds and pools.
However, there are a few beaches where I can bypass this irrational fear, and a few reasons for it. The first reason is that the water is very clear. It takes out that element of sharks lurking in hidden shadows. The other reason is that I have successfully (“successful” as in not being eaten by a shark) swum there many times before.
This is essentially the same premise I propose for anyone who is a beginner with investing. Make it low risk and dip your toes in. Then, once you see the waters are relatively clear, you can enjoy the swim and all the benefits that accompany it.
What is the “Dip Your Toes” Investing Strategy?
Essentially, for the “dip your toes investing strategy, you take money that you “were going to spend anyways” and invest it instead. That way, if you were to lose it all (highly unlikely) and the market crashes, you can rationalize that you weren’t supposed to have it in the first place…
A sort of easy come, easy go way of thinking.
When deciding whether or not to invest, taking it easy might be the best way to get started.
But, if the market behaves as it has since it’s conception, by trending up, then you might decide that investing isn’t so scary after all. The fear of lurking danger that is unlikely to materialize subsides, and your confidence rises.
I talked about this in my About page. For me, if I do not invest then I’m staring at 25 years of mandatory work. If I do invest, I calculate that my mandatory work time is reduced to somewhere between 5 – 9 years. This, along with knowing the history of the market, and having experience investing for a while, is enough to keep me invested long term.
But for others, that might not be enough. They might lack the experience, or because only bad news makes the news, the stories of the market crash of 1929 might have left an indelible print on their minds.
This is similar to how the movie Jaws affected my ability to swim in the ocean. Rationally, I know I am more likely to get in trouble driving to the beach, but rationale and fear don’t always mix so well.
So, if this is the case for you, and the idea of investing in the market seems daunting, I don’t blame you at all.
Maybe though, if you invested a little money that you were going to spend anyways, you wouldn’t be so concerned about it. You could watch it for a while and see if it takes some of the fear and mystery out of investing.
This is the premise that would work for me and that’s why I propose it. Now let’s look at where we can get these “expendable” funds with which to make the first investment…
Funding Your First Investment
We’ve already talked about “money you were going to spend anyways” above. So what is that? Nobody wants to frivolously throw money away or burn it up so what are we talking about here?
Well, first of all, I definitely don’t think of investing as “burning money” or “throwing it away”. Personally, I believe it’s a great tool to make your money grow.
But what I’m really talking about is money that you were going to spend on something you don’t actually need.
To start, take a month’s worth of the non-essential spending (that we all do), and direct it towards investing instead.
Cutting out some luxuries for a month could fund your first investment.
Instead eating out or getting a coffee out, set that money aside for investing. Instead of treating yourself to ice cream or purchasing a gadget for yourself on Amazon, put that money aside for investing instead.
That way, if your worst fears materialize, you’ll know that you only had to make your own coffee and some home-cooked meals instead of eating out for a month or so. In other words, it’ll be no big loss because you were going to spend that money anyways.
Another way of looking at it is that you are increasing your savings rate (if only temporarily). If this speaks to you and you want other ideas on how to save, check out this post I wrote on Drastically Improving Your Savings Rate.
Does that make sense? It’s just a way to rationalize taking that big step into the scary unknown.
Then, once you have accumulated this surplus of expendable cash (whatever the amount ends up being), you can think about investing it…
Making Your First Investment
Let’s face it, doing something that you find intimidating, is very difficult. As an aside, it’s also a worthwhile practice for teachers to do anyways. As adults we can more easily avoid the practices that we don’t feel successful at and that intimidate us. For students, many don’t have a choice what they do on a given day at school and it’s worthwhile to be able to empathize with this sensation.
So, if it helps, you can make this the thing you do that scares you (from Eleanor Roosevelt’s famous quote) and tell your class about it!
But, my suspicion is that once you try it, you’ll wonder what you were so afraid of.
Sometimes starting is more than half of the battle!
You can go online or just call up the brokerage company you want to start investing with. Personally, I have accounts with Vanguard and with Fidelity. I like both.
Next, you open an account and you transfer money into that account. This whole process probably takes 15 – 30 minutes.
Then, after a few business days, once the money has transferred, you can choose the fund that you would like to purchase.
Finally, just sit back and enjoy the show.
And just to be clear, I do NOT get any kickback from Fidelity or Vanguard. Also, as anyone reading this site regularly already knows, I am not a financial expert in any way shape or form. You should only do what you think is right for your money.
If you are interested, and not sure where to start, I follow a very basic investing strategy that I wrote about. It outlines some of the simple strategies I employ and the reasons I got there (as well as the people that influenced me). It’s called Investing Basics Made Very Simple.
In it, I talk about total market index funds as the main vehicle I use to invest. If you’re interested, I did a horse race between 3 of these funds to see which one came out ahead. The results are pretty interesting and you can find them in the post entitled Total Market Index Fund Horse Race.
Based on that article, and based on how much money you decide to “dip your toes” in with, you may want to choose FZROX (Fidelity Zero Total Market Index Fund) as your first fund. The reasoning is simple. Unlike other funds it does NOT have a minimum investment requirement. You can invest just one dollar if you want to! Most funds require a minimum investment somewhere around $2,500 so FZROX, might be a good one to try out if you only want to try a little at first… But that is entirely up to you.
Side note: In that horse race post I linked to above, there is another fund I reference as well that does NOT require a minimum investment either. It could be more to your liking so give it a look!
So far, the steps seem pretty simple don’t they?
Save some money you were going to spend frivolously anyways.
Open an account with a brokerage company like Fidelity or Vanguard.
Wait for the money you are investing to transfer into your account.
Buy into a fund.
Sit back and observe.
That’s where we are so far. And really, depending on how that goes for you, there may only be a few more steps in the process!
There are No Guarantees in this World
There is a scene from Jaws that loosely connects to what I’m about to say here. Really though, it’s just a classic scene that I’m shoehorning in! It’s a great opportunity to meet Quint, the cagey, seasoned captain hired to catch Jaws. It’s also a way to see a very young Richard Dreyfus!
The part that captures it starts around the 30 second mark. Go ahead and take a break to view it. You deserve it!
Classic scene from Jaws, that I use to illustrate how there are no guarantees in this world.
In the scene, Dreyfus’s character is packing an “anti-shark” cage, the likes of which old Quint has never seen. He has questions.
You go inside the cage? Cage goes in the water… You go in the water… Shark’s in the water… Our shark?
Singing: Farewell and adieu to you fair Spanish lady…
A total classic! But also totally ruined me for swimming in the ocean! Oh, the inner conflict!
Really though, all this is my way of saying that there are no guarantees in this world. If I go swimming in the ocean, I could be bitten by a shark. The odds are exceedingly low. But technically, it could happen.
The same, is true in investing. You could, in theory, lose it all.
Here’s what helps me think through this though:
The odds for this are exceedingly low (according to the experts that I trust).
Over time and throughout history, the reality has been that the market has gone up. I don’t want fear to interfere with my opportunity to capitalize on those money-earning opportunities. If fear dictated my actions I probably wouldn’t get out of the bed in the morning.
I heard JL Collins (a major player in the Financial Independence movement)speak about this and he said something along the lines of this: if the market crashes and burns and there is nothing left of it, we will all have far greater problems on our hands than the loss of our money.
That last one is kind of grim. Nevertheless, it, along with the other 2 reasons, are more than enough to keep me fearlessly swimming! No, there are no guarantees, but for me, the pros far outweigh this slim possibility of cons.
Deciding Whether or Not to Invest Long-Term?
After employing the “dip your toes” strategy, people may differ in how long it takes them to decide if investing is for them. This can be based on your personality, how well the fund does in that time, or any number of other factors.
Ultimately, which investment path you decide to take is up to you.
But, if you do decide you want to make the plunge, there really isn’t much more you have to do.
You’ve already got the account open and, in theory, you have probably decided that investing might be the thing for you.
The probable next steps, as I see them, are as follows:
Continue to increase your savings rate so you have more to invest.
Set up a monthly deposit amount into your investing account. (You can automate this from your bank account or your paycheck (usually). You can also have it automated so the money automatically invests in whatever fund(s) you decide upon.)
Optional. Consider setting a pre-tax investment account through your district. This can be a 403b, 457 or a HSA (Health Savings Account) depending on what your district offers. In most cases, these are very favorable because they get deducted from your check before taxes. Once you are certain that you won’t be needing the money any time soon (perhaps after establishing your Emergency Fund ), you may find it beneficial to start thinking long term and getting more bang for your buck with those pre-tax savings.
That’s it! As you can see, taking the time to set up the “dip your toes” account, was more than half of the battle. After that, once you have everything automated, you really don’t have to do a thing!
Beginning Investment Strategy – In Summary
I think it’s very natural to be intimidated by the idea of investing especially if you are a beginner. All the imagery that we absorb from the ether paints a certain image. This image suggests that investing is very complicated, time-consuming, stressful, difficult, and only for a select few people.
The reality, however, can be so far from that perception. There are paths that are recommended by very successful people, and are very easy to follow. These paths take advantage of the idea that has held true since the market’s conception.
Over time, the market always goes up.
The “dip your toes” investing strategy for beginners is a way for people to shed all of those preconceptions and view investing through a much clearer lens. Then, through this clarified view, they can make a decision that works for them.
It’s a simple, set -it-and-forget-it, approach to investing that reassures you about your future. It also allows you to focus on whatever important work you are doing in the present! Having such a low-risk, high reward proposition, is exactly what it would take to get someone like me to take the plunge.
I hope you find it helpful in your own lives as well.
Thanks for reading everyone. If you have any thoughts on what tipped the scales for you towards investing, I’d love to hear them. I’d also be interested in hearing about what, if anything, is still holding you back. Feel free to comment below or reach out and contact me any time!
Picking the right horse for your investment portfolio can be tough. I chose many horses and raced them.
As an investing strategy, I have chosen to go the route of using low-cost, broad based, index funds. This essentially equates to using “total market index funds”. You set them and forget them. But, there is a lot of conflicting information out there on which one is the best. Instead of going one way and feeling uncertain, I decided to get lots of total market index funds and compare them. Then, I just watched the results play out in real time. With real money.Here’s what I found…
I remember reading Seabiscuit back in 2005 or so when I was living in Spain. If I’m not mistaken, the lead trainer was able to look Seabiscuit (then just an unknown and unwanted racing horse that would go on to be one of the best ever) in the eye, see the fire that was there, and know that the horse would be great…
Then, there’s this idea of “looking a gift horse in the mouth,” which is apparently bad practice and rude. Keep that in mind the next time someone gifts you a horse… The idea was that you could look at the horse’s teeth/gums and know how old it was and therefore know how much value it could provide you.
Personally, I’ve never had much luck with premonitions and gut feelings. I think life has bestowed this wisdom upon me after some serious trial and error. We all want to think our gut is right every time, but I just haven’t found it to be true for me…
So, when it came to choosing a total-market index fund, I decided to get many of them and compare them to one another. It’s a horse race of sorts and I have early results I’d like to share. Mind you, the race isn’t over yet, but for me, there is a clear horse (or two?) that are out in front. I have some interesting results that have definitely swayed my thinking. Seeing my results might help sway your decision as well.
First though, I want to explain why I chose to compare total market index funds in the first place…
Why Compare Total Market Index Funds at all?
When I first plunged down the rabbit hole of Financial Independence (FI) and FIRE (Financial Independence Retire Early), I became convinced that investing in low-cost, broad based, index funds was the way to go. This essentially amounts to acquiring “total market index funds.” As a result, I came up with a very simple investing strategy that I outline here.
But, there was another message that I kept hearing throughout my research: “Nobody else can be trusted but Vanguard.”
When investing your hard-earned money, trust is not to be overlooked.
That was a bummer because I already had Fidelity. At the time, Fidelity had a total market index fund of their own. But, based on what I was hearing, other brokerage companies (other than Vanguard) could not be trusted. Their principle goal, it was said, was to make money for themselves, rather than save money for their investors.
So, naturally I opened a Vanguard account. But just as I did, I cut off my source of income by taking a leave of absence (I burnt out teaching).
In the meantime, Fidelity had come out with a brand new total market index fund with an expense ratio of 0.0%! I was intrigued…
Ultimately, before completely bailing on Fidelity, I decided to do a test. I now had 3 total market index funds at my disposal. Two were in Fidelity and one in Vanguard. Essentially I had 3 horses, and I wanted to see how they would fare against one another.
If Fidelity couldn’t be trusted, then I would see it in the diminishing results compared to Vanguard. Then, I reasoned, if that was the case, I could bail on Fidelity and feel secure in my decision.
I find the results to be informative. First, however, let’s get to know the horses a bit better.
Total Market Index Fund Horses
Of the three horses, which horse will come out ahead?
Like I said before, there were 3 “total market index fund” horses to compare at my disposal. Really though, if I wanted to open accounts at different brokerage companies (like Charles Schwab for example) I could have access to even more of these funds.
But that’s high maintenance, and who needs that? Besides, I figured I’d get the general idea without all of the added difficulty. Looking back, I believe I was correct in this assumption…
Without further ado, here are the horses!
Horse 1 – VTSAX – This is that thoroughbred, tried and true work-horse. It needs no rest. You could race it every day, and you’ll probably place as well! VTSAX is the esteemed Vanguard’s total market index fund. It has an expense ratio of .04% which is higher than the others. But, because it’s Vanguard and we trust it, the slightly higher expense ratio is merely an afterthought.
Horse 2 – FSKAX– This is the horse that is always in the hunt. It always has the 2nd or 3rd best odds to win, but never seems to actually win. However, on paper, it’s metrics make it more favorable than even VTSAX. But metrics don’t win races which is why people might dabble with this horse and throw a few bucks on it, but never bet their life savings on it. Maybe that will all change after this race? It has a lower expense ratio of .015 (less than half of VTSAX). It’s also a total market index fund. But it’s Fidelity and so, according to some, we don’t know if we can trust it to come through for us in the end…
Horse 3 – FZROX – This is the new exciting horse on the block. Everybody has been talking about it for years as it raced in the younger circuits. It has finally come of age and people want to see what it can do. On paper it has the best metrics and in person it is by far the most attractive. Its coat shines and its reassuring eyes sparkle. It effortlessly glides around the track as if the laws of physics do not apply to it. It is, in a word, beautiful. FZROX is Fidelity’s Zero Total Market Index Fund. It has an expense ratio of 0.0%! That means, in theory, Fidelity makes no money off of this fund. In fact, because every fund must cost something to run, Fidelity probably loses money off of FZROX. Such is the price of beauty…
But really, FZROX is known as a loss leader, which I’ll get into next. For now, these are the 3 horses I’ve been racing for the past 10 months. Which one would you choose based on the descriptions/metrics above? Choose now and see how you did later…
Next, we’ll briefly discuss loss leaders before we set the conditions for this high-stakes race.
What’s a Loss Leader?
When I was teaching in Italy, I felt almost obligated to travel. Here I was, living in Europe, where a new culture, with it’s rich history, was merely a stone throw’s away.
The problem was, I didn’t have a lot of disposable income. My job didn’t pay all that well and I was still paying off grad school. I couldn’t exactly afford Europe’s finest hotels and cuisines. Or the air fare…
Luckily, there was a little company called Ryanair. If you’ve been to Europe you’ve probably heard of it. Essentially it was (and probably still is) an incredibly cheap way to fly around Europe. You could routinely fly round trip for under 50 euros. No problem at all.
Ryanair advertises loss leaders to attract customers to its site.
How Ryanair could afford this, I know not. But business was thriving and I wasn’t going to question very cheap flights.
In addition, they had these promotions whereby you could fly from Italy to Norway (for example) for free. You would have to pay for taxes and that ended up being around 5 Euros. But, there were no hidden fees ,and essentially, if I was able to get one of these promotions, I would pay 10 Euros or so to fly to Norway and back! 10 Euros is probably 12 or 13 dollars. When you think about what you can get for 12 or 13 bucks, I’m sure a round trip to Norway doesn’t come to mind!
But, this was a great example of a loss leader. By having these outrageous promotions, they surely lost money on the people who took advantage of them. BUT, they also increased their traffic by many times, which more than paid for the loss they took for the free flights.
The promotion brought people to their site. Once they were there, however, maybe they decided that they wanted to go somewhere else. “It’s only 50 Euros for that trip to Budapeste? I’ve always wanted to go there,” the hypothetical vacationer probably reasoned. Click, click, booked.
The loss leader brought in tons of extra business!
The same can probably said for Fidelity’s zero fee index funds. Fidelity has four of these funds. They cost nothing to the investor and Fidelity probably loses money on them. However, the loss leaders get the people to open an account. Then, once they are there, Fidelity can begin influencing these people towards some other investments that will make them money.
That’s the logic, the best I can figure. For our purposes however, it gives us a nice shiny new horse to race and I’m eager to tell you how it fared as we compare total market index funds…
One last thing quickly… One more cool thing about Fidelity’s Zero Index Funds (no this is not an affiliate program. It’s just helpful!) is that you don’t need a minimum amount to invest. For some other funds you usually need at least $2,500 or so to get started. Here, you could start with $1 if you wanted. It wouldn’t do you much good but it’s a start that you could do!
Back to the race. Before we fire the starter’s gun, let’s make sure the race is fair, so we can feel secure in the results later…
Race Conditions
For the results to be validated, the track and conditions have to be the same.
If you are going to have a race, and you want the results to stand, the conditions have to be the same. You can’t have one horse race one day on a dry track with perfect conditions and then have a different horse race on a different day where the winds are gusting and the same track is thick with mud. Technically, it would be the same track, but nobody would legitimize those results…
In the same vein, if I wanted to compare total market index funds legitimately, I knew I had to make the conditions the same.
So, for starters, I bought the SAME AMOUNT of each of the 3 funds AND I bought them on the exact SAME DAY.
And, each time I add to them, I follow the same guidelines. I buy them on the same day with the same amount of money.
And Just FYI, Mutual funds are purchased at the end of each day, after the market has closed. Thankfully I didn’t have to think about clicking “buy” at the exact same millisecond to make sure the market was identical.
Then, I just sat back and watched the race knowing the conditions were equal!
Now, the moment you’ve been waiting for! Here are the results of the race!
Race Results!
Knowing that the conditions were equal and that I bought the same amount of each fund on the exact same day, you might expect that the results SHOULD be based on the expense ratios.
After all, they are all total market index funds.
Have you chosen your winner yet? Which one crosses first?
But, even though they are all the same in name, they might vary in how much of each company they purchase.
For example, one fund may be comprised of .25% Microsoft and the other might be .5% Microsoft. Then, if Microsoft has a huge day of swing, those funds could vary slightly in results.
But none of that really matters to me. I just want to compare these total market index funds to see which one performs the best.
So, let’s get to it. Below is a table of the results from my little experiment. I plan to come back and update this table from time to time. That way, if the results ever change, you can be in the know.
Date
VTSAX
FSKAX
FZROX
3/29/22
3rd place
2nd place (+$1.06)
1st place (+$71.74)
Comparison of 3 total market index funds bought at the same date with the same amount of money.
As you can see, FZROX is in the lead by a length! FSKAX and VTSAX are virtually identical.
And just FYI, I won’t give the exact amount of money I invested for a few reasons, but also because I hope to keep purchasing more, and it will always be changing. But $10,000 of each is in the right neighborhood.
Let’s quickly analyze the results and make sure we are on the same page.
What do the Results Mean?
Basically, my conclusion is that all of these are pretty much the same. Right now it looks like I won’t go wrong with any of these.
But, in fairness, if we are all attracted to winning on the margins with fractions of a percentage point, then there is a compelling case to be made for FZROX.
Mostly however, I was curious whether brokerage companies like Fidelity did have secret, covert tactics to skim money without having to report it in the prospectus report.
For now, at least, the results don’t support this finding. So, if you, like me, already have a Fidelity account, you might not need to scramble to open a Vanguard account, (though I’m still glad I have one).
And remember, I’m NOT a financial expert. I’m just a teacher. This is all just information I am using for my own investing. What you do with your money is completely up to you.
I also want to note that I do NOT get paid a dime by Fidelity, Vanguard or Charles Schwab. They barely know I exist (tears).
Normally, I would put a bow on this one, but looking back on the race track I see a new tornado of dust surging up the line! Hold on folks, this race is not over!
Late Surge from a Fourth Horse!
Unbeknownst to me, a fourth horse has entered the mix! It is absolutely screaming down the track and doesn’t look to be slowing at all. It just passed VTSAX and FSKAX and it’s got FZROX in its sights! This one is going to be a photo finish…
Actually it’s not even close. This 4th Horse just won by a landslide. Let me explain…
The fourth “horse” out ahead gets disqualified for obvious reasons…
It just so happens that on the very day I purchased VTSAX, FSKAX and FZROX I purchased the exact same amount of a 4th fund.
It’s another of Fidelity’s zero expense ratio loss leaders. This one, however, instead of being a total market index fund is a “large cap blend”. Basically, instead of having all publicly traded companies, it only has the biggest companies (Your Apples, Amazons, Microsofts, Facebooks, etc.).
So really it’s very different, and comparing them isn’t fair. It’s also a bit apples to oranges. If the larger companies have trended better than the medium or smaller ones in the past year, then this will do better.
But since I have the data right here, I might as well share it right?
The fund is FNILX. It’s Fidelity’s Zero Large Cap Index Fund. The Expense Ratio is 0.0%.
At the time I am writing this (3/29/22), it is over 2% better than FZROX. This is probably more in line with Warren Buffett’s plan for his money. If you remember from last post, investing basics made very simple, I told you that Warren Buffett planned to invest some of what he left behind (the rest he plans to donate) in S&P 500 index funds when he was gone. Those are the 500 largest companies and are all considered “large cap”.
So, FNILX, which is a “large cap blend” is probably more in line with his plan. And, as I said before, if Warren Buffett gives me investing advice, I take it.
So, for what it’s worth, FNILX is ahead by a few lengths on the other 3 horses. This could change over time and I’ll keep you up to date along the way with this one as well.
Here’s a new table so we can compare the total market index funds alongside FNILX.
Date
VTSAX
FSKAX
FZROX
FNILX
3/29/22
3rd place
2nd place (+$1.06)
1st place (+$71.74)
Disqualified but (+$220)
New comparison of 3 total market index funds (plus FNILX) bought with similar conditions.
Summary of Total Market Index Funds
If, like me, you buy into the idea of investing in low-cost, broad based index funds, like many of the people I follow endorse, then you are probably going to have some total market index funds in your portfolio.
Some people, like JL Collins, only have VTSAX as their investment vehicle.
As I was researching and planning for my quest towards financial independence, the concept that Vanguard was the only trustworthy brokerage company, surfaced from time to time.
I’m not going to refute that. Vanguard has a sterling reputation that is built on a foundation of trust and doing what’s right for its investors.
Nevertheless, based on my results so far, I see no reason to transfer my money from Fidelity to Vanguard. Fidelity’s total market index funds are ever-so-slightly ahead of Vanguard’s (and in the case of FZROX, not insignificantly).
For now, this tells me that no hidden fees (of consequence) are being extracted and I can feel good with Fidelity’s options as well. If this changes, however, I will be sure to let you know!
For now, I feel secure in my decision but I am very open to your feedback as well! Did these results surprise you at all? Is there anything else you think I should consider? Leave a comment below or reach out and contact me any time. Thanks for reading and be well!
I like to keep my investing strategy simple and let the investments do the heavy lifting for me.
This post seeks to take a daunting subject, such as investing, and break it down into simple, manageable steps that anyone can follow. Along the way you will hear reasoning and sources, far superior to me, that help vet this line of thinking. Over time, I have adapted these basic investing strategies as my only form of investing.
If you are anything like me, then when you hear the word “investing” it conjures images of maniacal people waving tickets on Wall Street yelling “Sell!” and “Buy!” and whatever else they do. That is, in a word, stressful.
It’s also incredibly intimidating.
It’s enough to completely rule out the mere idea of investing for myself. There is no way, as a teacher, that I will have the bandwidth to deep-dive some company, like Warren Buffet does, and look at their practices and margins and try to predict if they are a winner or not.
Not happening.
And you know what else is not happening? Me, monitoring the stock market to see if some stock dips or spikes so that I can buy low and sell high… I’m teaching during the day and have no energy for that either.
Thankfully, the approach I am taking to investing does not involve any of those aforementioned practices.
It is backed and vetted by many other sources (which I’ll share and which include Warren Buffett himself). It’s also low maintenance. I set it and forget it.
In this post I will share these very basic strategies that I use, but first I want to dig a little into why I choose to invest in this manner…
Why Invest at all?
With everything on this site, I am going to tell you why I do things, so you can decide if it works for you. I’ll also say this until I’m blue in the face: I am NOT a financial expert and am not telling you (and never will tell you) how you should use your money.
Now that that’s out of the way, here’s why I choose to invest:
Investing Basics Reason 1 – Inflation
Due to inflation, the value of each dollar you possess, goes down over time. It’s how grandpa could brag about getting a gallon of gas for a nickel. If my money sits under a mattress or in a checking account (basically the same thing), it loses value. I don’t want it to lose value. I want it to gain value. That’s one reason I invest.
Investing Basics Reason 2 – The Market has always gone up over time
Many times, when we hear the word “investing” the word “risk” is not far behind. And true, with every investment their is some level of risk. But can we all agree, that some investments are riskier than others? With that in mind, I try to mitigate risk and still jump on this trend that has been happening since the conception of the stock market. The trend is this: “Over time, the stock market always goes up.”
I want to capitalize on the market’s upward trajectory since its conception.
Sure it’s got dips and dives with its spikes and highs. But, since its conception, it has trended up to the tune of 8% return per year. This is what I want a piece of. I’m not doing the high risk investments that can double overnight or some such nonsense. Frankly, that scares the daylights out of me.
Nope, I just want a piece of that 8% improvement per year. And if you’ve read my post on doubling money or the one on compounding interest, you know that an 8% return will double your money every 9 years or so. And as you keep adding to it and harnessing this power, your net worth begins to grow exponentially.
This is what I want a part of! This is another big reason I choose to invest.
Investing Basics Reason 3 – People much smarter than me tell me to invest
Whether it’s my wizened parents, Warren Buffett, or the many characters I have discovered and come to trust in the world of personal finance, they are all delivering a very similar message: If you want your money to grow, you need to invest it (wisely).
Reason 4 – If I don’t, I have to win the lottery or work for 25 more years
This is kind of related to reason 1 of not letting your money sit and erode due to inflation. However, it’s also distinct in its own right.
As you probably know, the whole reason I am here writing this is because I burnt out teaching, found personal finance and wanted to share my findings so other teachers (or anyone else) could find the same hope that I found.
I invest so I don’t have to gamble!
Before I found this world I was staring down the barrel of decades of the job that had me burned out so I could collect my full pension. Because that was so very daunting, I was desperately scrambling to find other jobs I could do to preserve the 11 years of service I had already completed.
It was looking pretty dire.
Now, given my new plan, I’m hoping for 5 -9 more years before I have the option to retire. I won’t need that full pension. Head to my “About” page for a rundown on how I plan to make that happen.
None of this is possible if I don’t invest so I’m going with it. This is also connected to reason 5.
Investing Basics Reason 5 – I’ve done it before and it has worked!
There is no substitute for experience right? Sometimes a student needs to actually employ the strategy you are teaching before they buy in right? Well, that’s what worked for me.
When I was younger and working in a hospital out of college, my parents convinced me to start a 403b plan, even though I was making low salary and living in Boston. The fact that this hospital had a matching program (read: free money) was what tipped the scales for me.
I’ve seen the benefits of investing in my own life, which has helped take some of the fear and mystery out of it.
So, I did the paperwork, put my money in whatever funds my parents suggested, and pretty much forgot about it. Years later (15 or so), when my interest piqued again around investing, I happened across these accounts again. I don’t know how much I put in, so I can’t say for sure, but since that time I would say my money has doubled 3 times. That means, if I put in $5,000 for example, it would be (10, 20, 40) $40,000 now. Mine was a little less than that, but the results were right there!
I was able to see first hand how money that I literally invested and forgot about had grown significantly over time. And in 18 years at 8% (2 more doubles) that hypothetical $5,000 would become $160,000.
You can see how this becomes very enticing! And if you are new to this, then this probably sounds like some infomercial hocus pocus. About now is when I make a pitch for you to “act now” and “sign up for my course to uncover all my secrets” and all the rest for this “limited time discount”…
Can I just say that I can’t stand that crap?
No pitch coming. Would I like to make some money off this site eventually? Of course! It’s a lot of work… And if you ever see an advertisement with a fake “x” on it or one that follows your cursor around like an annoying house fly, then you can smile to yourself and know that I’ve finally sold out.
But until that glorious day, I just want to bring you value, thought provocation, hope, community, support and entertainment.
So now I’d like to tell you what this devilishly simple plan is, the thinking behind it, and the masterminds that have devised/vetted it.
The Devilishly Simple Plan for Basic Investing
Honestly I could probably summarize my basic investing plan (that I got from others) in one sentence. If I did, however, I don’t think people would pay it any mind because there would be no context.
With this post I’m giving you the reasoning and the architects behind it, to give it some credibility.
Nevertheless, the following sentence sums up my investment plan:
Buy low-fee, broad based, index funds.
That’s it.
And there are three parts to that sentence worth breaking apart (low-fee, broad based, and index funds) to have a better understanding of what they are.
What is an Index Fund?
Before I get to “low fee” and “broad based” let’s quickly talk about what an index fund is.
Basically, an index fund is a collection of stocks and/or bonds, grouped together, that follow a specific “index”. By buying each stock/bond in that index, there is no decision making. It’s just automatic.
Investing does NOT have to be so complicated!
For example, a “total market index fund” will buy every fund on the market (in very small amounts).
Another example would be a S&P 500 index fund. This index fund would have each of the top 500 companies (for the most part) in its fund.
There are no people strategizing or tinkering. It’s just automated. This keeps costs very low and reduces transactions as well.
The end result is that you don’t have to take on exorbitant fees and can keep a much higher percentage of the money for yourself.
In general, index funds outperform a large majority of human run funds. The fact that they cost less and earn more, makes it a no-brainer for me.
Low Fees
Over time, small percentage gains can lead to great amounts through the magic of compounding interest. Similarly, high fees over time, can have the opposite effect. They can sap your earnings.
For a better understanding, I wrote a post called Mutual Funds, Index Funds and ETFs Explained. Give it a look if those are still a little confusing to you like they were for me.
But for this post, we should know that each fund has an expense ratio associated with it. This is basically “the cost of doing business” or how much a brokerage company (like Fidelity, Charles Schwab or Vanguard, to name a few) charges for you to have access to their funds. These expense ratios and any other fees are all pretty easily accessible (though some more than others) for the most part.
Skip all of the big fees with index fund investing.
Expense ratios typically range from very high (2%) to very low (0%). And at first blush, it’s very natural to think “2% is high? That doesn’t sound all that bad to me.” And I agree that it doesn’t sound bad, but it can have a major impact on your net worth over time. Let’s look.
Using this expense ratio calculator from Nerdwallet. We can see how different expense ratios can impact our long term net worth.
For the sake of simplicity, I’ll invest the same amount ($10,000) each year for 30 years (typical amount of time for a teacher to get their full pension) with the typical market return of 8%, and I’ll only change the expense ratios. (I’ll use expense ratios of 2%, 1.5%, 1%, .5%, .25%, and .05%) and see the impact it has on our net worth.
Below is a table of the results:
Expense Ratio
Cost of Expense Ratio
.05%
$13, 114
.25%
$64,178
.5%
$124,992
1%
$237,232
1.5%
$338,049
2%
$438,633
This table shows the cost of various expense ratios over 30 years investing $10k per year with a market return of 8%.
Spoiler alert: The funds I will be recommending will NOT be costing $438,633 over 30 years! Mine are going to be the lowest or even less.
But looking at the table shows the power of these seemingly small differences in Expense Ratios over time.
The difference between a 2% Expense Ratio and a .05% Expense Ratio over 30 years is $425,000!
Yes! You read that correctly! I want to keep that money for myself thank you very much. Fidelity, Charles Schwab, Vanguard, etc. make plenty as it is…
The next thing you might be thinking is “Well, maybe the 2% Expense Ratio is because that fund is better.”
This too is natural to think. We typically think that more expensive products are better (and sometimes this is true). But in this case, it doesn’t bear out.
Index funds generally have lower expense ratios because they are not managed by humans. They are passively managed by computers. Because actively managed funds require humans they cost more and this manifests itself in the expense ratio.
The statistic I keep seeing is that index funds outperform 80 – 90% of actively managed funds.
So, chances are the index fund will cost you much less AND do better. Sign me up for that!
Broad-Based Index Funds
The next part of the investing concept for, low-fee, broad-based, index funds, is this term broad-based.
This essentially means that the index fund will be covering A LOT of different companies rather than only a few.
In the past I have owned mutual funds that only have 40 or 50 different companies (or stocks) under their umbrella. This is a narrow base. And if one company does poorly, the whole fund can suffer.
In the broad based fund that I now use, it will cover between 500 and thousands (all) of the publicly traded companies. It will have very small portions of each company. That way, if one does poorly, it will not bog down the whole fund.
JL Collins, who is on the Mount Rushmore of Personal Finance figures (IMHO), also talks about the “self-cleansing nature” of these broad-based “total market” funds. If one fund tanks, it can only lose 100% of its value. It departs and makes room for a new fund.
If there were a Mount Rushmore of investing, JL Collins would have his face on it (IMHO).
However, if it excels, it can far exceed 100% growth. By owning this “total market” fund you own a very small piece of this company and thus reap the benefits of its success.
JL Collins has a blog and a website that I will write about shortly. I really like his fearless, no-nonsense style. He calls it like he sees it and in no uncertain terms. If you are interested in his work, head over to his blog and check out his stock series for his ideas on investing.
Here’s a link to the stock series, but the whole site is worth a look if you find time. Much of what I do is based on the ideas of JL Collins and others in the Financial Independence Community.
So, getting back to it, for me, broad based mostly equates to “total market” funds that cover nearly every publicly traded company there is (in very small portions).
I also own some index funds that only deal with the fortune 500 companies as well. I’ll get into that next.
Fortune 500 Index Funds
“I recommend the S&P 500 index fund and have for a long, long time to people.”
That is not a quote from me. That’s Warren Buffett in an interview with CNBC. He is widely considered to be one of the greatest investors of all time. But he doesn’t recommend that you pick stocks like he does. He recommends an S&P 500 index fund.
If Warren Buffett gives you investing advice, you should probably take it…
So, by my logic, if it’s good enough for Warren Buffett than it’s definitely good enough for me.
Simple as that.
For this reason I also incorporate some S&P 500 funds in my portfolio.
So, let’s get into some names of these funds.
Simple Investing: Total Market and S&P 500 Index Funds
Because I only recently came across this strategy, I am still gradually phasing out other, more expensive mutual funds I already owned. I am doing it gradually for the purpose of reducing costs.
However, if I were to start fresh today I would just invest in the following funds:
Total Market Index Funds:
VTSAX – This is Vanguard’s Total Market Index Fund. This is the one that nearly every Financial Independence (FI or FIRE) person recommends. Vanguard is the gold standard for low cost index fund investing. They have built a reputation to be trusted and that is why they always get the nod over other brokerage companies. The expense ratio for VTSAX is .04%
FSKAX – This is one of Fidelity’s Total Market Index Funds. With an expense ratio of .015% it is even lower than VTSAX. However, people in the FIRE community warn that some companies sneakily take money elsewhere. To test this, I am doing an experiment which you can read about here. I already owned Fidelity when I discovered FIRE so it was much lower maintenance to transfer funding to FSKAX than transfer to Vanguard. I am also trying another Fidelity Total Market fund with an even lower expense ratio.
FZROX – You cannot get lower than zero when it comes to expense ratios! This one, FZROX, is a loss leader for Fidelity (which means it attracts clients with the hopes that they will buy other funds as well) that it presumably makes zero dollars off of. The expense ratio is 0.0% and it is also a total market fund that is also part of my personal experiment.
SWTSX – This is Charles Schwab’s Total Market Index Fund – I do NOT own this one. But Charles Schwab is a major player and if you already use them it may be easier to get this fund than starting anew with Vanguard. The expense ratio for this fund is .03%. This puts it right in line with the others and I see no reason it wouldn’t have very similar results. But, as you know, I’m not a financial expert and have not done any real research on this one either.
Investing Basics: S&P 500 Index Funds
These are the ones that Warren Buffet recommends. I have some of these as well because, who am I to argue with Warren Buffett? Basically though, these will only follow the top 500 companies being traded on the market. It will not follow all the companies like a total market index fund. Here are some of the options.
VFIAX – This is Vanguards version of the S&P 500 index fund. The expense ratio is .04%.
FXAIX – This is Fidelity’s version of the S&P 500 index fund. The expense ratio is .015%.
FNILX – This is Fidelity’s loss leader in this category. It has a 0.0% expense ratio.
SWPPX – This is Charles Schwab’s version of the S&P 500 index fund. The expense ratio is .02%. I do NOT own any shares of this one.
All of the funds listed above will carry the same stocks but they might have slightly different amounts of different companies. For this reason, their results can vary slightly as well. In my limited experience, I have not seen a variance that is remotely noteworthy between the different funds that I carry. In other words, in my unprofessional opinion, these are all pretty much the same.
A Word on Bond Funds
I have already noted JL Collins and his influence on so many of us in the personal finance community. Among other things, he has the blessed benefit of experience. He has worked in the field nearly all of his adult life and was able to distill his investing strategy down to 2 simple funds.
The first fund he invests in is (noted above) Vanguards Total Market Index Fund (VTSAX).
You can decide if bond funds are a fit for you as well.
The second fund that he invests in is VBTLX. This is Vanguard’s Total Bond Market Index Fund.
Basically, at the end of each year, he balances his portfolio so that he has a certain percentage in VTSAX and the rest in VBTLX.
I believe, for most of his adult life, his personal balance is 80% in VTSAX and 20% in VBTLX. However, he talks about how people might want to change those percentages (in favor of VBTLX) as they near retirement.
And basically, for your purposes, if you like that strategy, you can alter your percentages for the level of risk you are comfortable with.
If you want higher risk, you can have a higher percentage of VTSAX. For a lower risk, you can raise the percentage of VBTLX (bonds).
He explains it way better than I ever could (and in gradated levels (easier to harder)) in this post right here, so go ahead and click on it for more information on bonds.
But basically, he says bonds are a hedge against deflation and, because they are less volatile than stocks, bonds tend to smooth out the investment journey.
So, if this is of interest to you, I recommend you click on his post AND, if you are still sold, you can determine a percentage of bonds that works best for you.
So Why Bother with TeacherDouble?
I can hear the thoughts now: “If these other sites are so great, why should I bother with yours Mr. D?”
Well, I certainly can’t compete with the likes of JL Collins. He has decades of experience in the field of finance and more knowledge than I could ever hope to attain.
BUT, (Hold on! There’s a “but” here!) hopefully in the back of your mind, you are also thinking “if Mr. D. gives it to me straight on this one, he’s going to keep on giving it to me straight moving foward…” That is partly why I think I provide value.
I am a curator of information. I find the best stuff and present it to you so you don’t have to do the hours and hours of research that I did during my deep dives.
Also, if you are a teacher, then I am going to give it you from a teacher’s perspective. I plan to wax philosophical on the field of teaching along the way. I not only want to give teachers the best financial resources, but some of the best resources to keep them happy and healthy in their careers as well.
And maybe I can splash in a little entertainment from time to time along the way…
One of my general missions is to keep teachers secure in their futures, so they can focus on the important work that they do. I mean that sincerely and I hope it comes through.
So, that’s my general argument and I’m very thankful to have you aboard!
A Summary of Simple Investing
Index funds, because they are passively managed, generally outperform actively managed funds. One reason for this is because their expenses are significantly lower
Earlier, when comparing expense ratios, we saw that, over time, an elevated expense ratio can have a very significant impact on your total wealth.
By keeping costs low, you keep far more of that money to yourself (in one of our examples it was a difference of $425,000!).
Most people in the Financial Independence Community recommend total market index funds (namely VTSAX from Vanguard).
Warren Buffett recommends S&P 500 index funds.
I have both.
Finally, as a hedge against deflation and a means to manage risk, VBTLX, (Vanguards Total Bond Index Fund) could be a consideration for you as well.
In the end, I hope you’ll agree that dispensing funding between 2 or 3 different index funds is a very simple plan for investing.
Thank you for reading. If you have any comments please feel free to enter them below or you can always reach out and contact me individually.
Retirement looks different for everybody, but sooner rather than later, I hope to achieve mine.
The following post outlines how I plan to retire early from teaching. After experiencing burnout, I began to desperately search for alternatives to teaching. Instead, I came up with this plan built on the ideas of others.Here’s what I came up with...
If creative writing falls under your purview in teaching, you know that, when left to their own devices, most students (read: all students) will opt to forego the planning stages and just wing it.
Before long, the bully is being attacked by benevolent aliens who have teamed up with (fill in a powerful foreign country)’s military.
But wait! The aliens are not benevolent after all! It was all a ruse! Also, the foreign country’s military planted spies all over!
Now the main character (usually the kid writing) has to assemble a team of special forces (four kids that also happen to be in our class), to neutralize the aliens, root out the foreign spies, and repel the bully.
How does this team of 5 do all that you ask? On the backs of dragons of course…
You get the idea. Ultimately, the point is that i it helps to make an outline. So here I am practicing what I preach.
Here is my general outline for how I plan to retire early from teaching:
How I Plan to Retire Early From Teaching – An Outline
When I was in the throes of burnout and just trying to survive until the end of the year, my initial thought was this: “I HAVE TO keep my pension at all costs!”
Really, I just want to have the option to retire. This idea alone, and knowing it will come much sooner than I originally anticipated, gives me hope.
Now, I still want to keep my pension going (I’m only 12 years in) but I don’t feel the need to get to year 30. If I’m thoughtful, and a few things go my way, I think I can cut it down to 5-9 more years.
Between then and now, I have gone down many proverbial rabbit holes and devised a plan. It’s not set in stone however, so feel free to offer ideas!
Nevertheless, here are the steps I plan to take so I can retire early if I feel the need to. I think you’ll find that, even if you are not planning on retiring early, following these steps and having a backup plan, is never a bad idea.
Step 1 – Improve Savings Rate
Improving you savings rate will put you on the fast track to early retirement!
If the end goal is to have enough money to retire early from teaching, then I need to make sure I’m not frivolously spending the money that will buy me that time.
Increasing my savings rate is a double-edged sword and cuts two ways.
The first benefit is the obvious one. If I spend less money, then I will keep more of it!
The second benefit is only one layer away, but it’s one that I hadn’t thought of on my own. If I spend less money, then I need less money to get by! If I need less money to get by, then I need less money for retirement.
Here’s an extreme example of that second benefit. If I buy a Porsche, hire a full-time chef with living quarters in my mansion, spend my free time buying extravagant stuff online, and go to Las Vegas every weekend, I am going to need A LOT more money to maintain that lifestyle after I retire.
However, if I am perfectly content to live without those “luxuries”, it is going to take MUCH LESS money to maintain my lifestyle. That means I will need far less total money saved to retire.
If time is the most precious commodity for you, like it is for me, then suddenly that impulse buy becomes far less enticing.
This is why, it’s clear to me that I need to improve my savings rate.
Step 2 – Maximize My Retirement Contributions
In the previous post on compounding interest, I briefly discussed how it’s impossible to look at your financials without regrets. Not maximizing my retirement contributions is one of my biggest regrets.
Before last year, I just assumed that I would retire after 30 years of teaching and have steady income for the rest of my days. “I don’t need to contribute even more to retirement,” I thought. I wish I could get that one back.
Then, after burning out, 30 years began looking impossible and I had to reassess.
One of the concepts I rediscovered was this concept of “tax-deferred retirement plans.” For most of us this is a 403b plan (which is essentially a 401k for people performing a public service such as teaching).
Basically, you don’t get taxed on the money until you withdraw it from your retirement account. But by the time you retire, you are in a much lower tax bracket (because you are earning less) and so you get taxed at a much lower rate.
In addition (this has lots of benefits) that money was hopefully invested and has grown.
Also (yup there is more) the money you allocate for your 403b doesn’t get reported as income. This means you pay far less in taxes each year you do it. That’s even more savings!
There are a lot of great resources out there that explain it better than I can. I will do a post on it and connect to those resources as well.
Essentially my plan is to extract $19,500 tax free from my income and contribute it to my 403b retirement plan. This will save me over $4,000 per year in taxes and provide other benefits as well.
A 403b is like a 401k for teachers. Its benefits can be huge!
And remember, I’m already increasing my savings rate so I don’t need as much now. I’m buying time and my extra savings allows me to max this out. Even if you can’t max yours out, I think all of us should be taking advantage of these tax-deferred retirement plans. That way we don’t leave free hard-earned money on the table.
If you’re convinced, like I am, that this is a good idea, reach out to your HR department and inquire about opening up a 403b plan.
Step 3 – Invest Wisely
We’ve already seen, in previous posts, that if we invest wisely then we can harness the power of compounding interest and double our savings at a much higher clip.
On average, since its conception, the market has returned 8% per year. At that rate my money will double every 9 years and that suits me just fine.
Investing wisely can help your net worth grow exponentially and put you on the fast track to retire early.
I don’t need any get-rich-quick schemes. Just give me slow and steady. Of course, there are no guarantees in life and there is always the possibility that the market goes down.
But if I don’t invest, my money is just sitting there and losing value to inflation. I won’t go too deep into that now, but Grandpa telling me how gas cost a nickel when he was a kid is a good example. Essentially, just like that nickel, our money buys less with time due to inflation. If I don’t invest, the buying power goes down.
So what will I invest in? Essentially, after all my research I’m on board with what the leaders in the FIRE (Financial Independence Retire Early) movement promote.
My answer is perfect for a teacher. It’s low maintenance. I just set it and forget it. I’m not monitoring the market and trying to buy all these stocks that I know nothing about.
This will be another post as well, but essentially my plan is to put my money into low-fee, total market index funds.
These funds cover all publicly traded stocks at once. That way I don’t have to pick individual stocks (which just feels like gambling to me) I just get them all at once.
It also has very low fees which don’t cut into my savings.
I’ll direct you to posts that explain this better, but for now, here’s a quote from Warren Buffett as proof of concept.
“By periodically investing in an index fund, the know-nothing investor can actually out-perform most investment professionals…”
If the person who is widely recognized as the greatest investor of all time says that, then it’s good enough for me…
Find A Side-Hustle for Extra Income
This is a key ingredient for my plan. Can I find a side hustle to get me $10,000 per year in extra income?
While I’m teaching, I really doubt it. But if I can come up with a reliable source of income to bolster my retirement income, it can act as a buffer so I don’t spend down my savings too quickly.
So what will I do for this side-hustle? TBD! So far I have built a few outdoor tables and sold them on Craigslist for $250 apiece. I averaged about 1 sold every 6 weeks.
Here’s an outdoor table I sold.
I doubt people want these in the winter. So maybe I could sell 6 per year? That’s $1,500 of the $10,000, but those don’t take up too much time either. And that’s just one example but it’s already 15% of my goal.
Ultimately, I don’t think it will be too difficult. Whether it’s teaching English online, tutoring, freelance writing, woodworking, or something else that comes up between then and now, I am confident that I will find a reliable source of extra income by the time I retire.
If I average $20 per hour for 10 hours per week, I can get to $10,000. That’s very doable!
And don’t forget, I plan to be earning interest from investments!
The Numbers Behind My Plan to Retire Early
I haven’t chosen my FI (Financial Independence) number yet. Your FI (often pronounce like “hi” with an “f”) number is the amount of money you need saved so you can quit working and live off your savings.
The letters FI are also the first too letters in the acronym of FIRE (Financial Independence Retire Early).
FIRE is the movement for people who have decided they don’t want to follow convention and spend most of their lives at work. So, as part of my backup plan, I’m borrowing from their ideas to come up with my own strategy.
For the sake of argument let’s say my FI number is $400,000 which is probably low. That number does not leave too much room for error.
We’ve already decided my side hustle will make me $10,000 per year.
But I will also make interest off of my investments. Let’s say I make 5% interest per year (hopefully low). 5% of 400,000 is $20,000 per year.
$20,000 + $10,000 = $30,000 per year. And I haven’t even gotten my pension yet!
Teacher Retirement Pension Plans
Teacher Pensions, vary greatly from state to state. If you have a moment, check out this NY Times article on the grade your state’s teacher pension plan received.
If, like me, you are from Massachusetts, then its kind of bleak. Massachusetts gets an “F”. This essentially means, I will never effectively recoup the money I actually put in.
The New York Times article on teacher pensions does NOT paint a rosy picture.
So, if I retire in 5 years, for example, I will get a measly 25% of my income starting at age 55 for the rest of my life.
And you know what? That suits me just fine!
By then my salary will be about 80,000 per year. 25% of that is $20,000 per year for the rest of my life.
I actually think that I only need about $25,000 per year on average to get by.
We’ve already established I’ll get about $30,000 per year from interest and my side hustle until I’m 55. Then I get an additional $20,000 per year for my pension. That puts me well over my target of $25,000 per year.
And that, in essence, is my plan to be able to retire early from teaching. To accomplish it, I’ll need to make some lifestyle changes and even better financial decisions. I’ll keep you in the know all along the way.
But to me, the freedom to choose my next direction and spend more time with my family (and higher quality because I won’t be so rundown) is absolutely worth it.
In Summary
It never hurts to have a backup plan.
You may find yourself 30 years into teaching and yearning for more! To that I say, congratulations!
For me, after experiencing teacher burnout, I felt as though I needed to come up with a better plan for myself.
If you are reading this and unsure which path your future will lead you, I still think the first line holds true. It never hurts to have a backup plan.
Any way you slice it, saving more, increasing retirement contributions, investing wisely and finding a side hustle, isn’t a bad strategy to have.
That’s my plan for now and I’d love to hear your thoughts on it as well. Post a comment or reach out and contact me.
My wife and I stayed at this picturesque rice farm in Laos in 2014. And yes, it relates to the post!
Gather round kids, it’s story time.
Normally, when I say “story time” in the class, you can almost guarantee that there will be at least one audible groan. You can’t please them all. Secretly though, I think they like my stories.
But this is not my story. This is a folktale from India called “One Grain of Rice” by Demi.
It is a very powerful lesson on the monstrous power of doubling your money. It will help us understand how we can get our money working for us. That way we can double our money faster.
It will also connect to important financial concepts such as compounding interest and “the rule of 72”.
These ideas are keys for how I plan to retire from teaching in 5 years.
As you may know from my introduction, last year I came down with a serious case of teacher burnout. Since then, I have discovered the world of early retirement and it has given me hope. Hope, and the feeling that I can now persevere.
If you are suffering from teacher burnout and you want to tip the scales of hope in your favor, then you are absolutely in the right place.
First, let’s get to the story. You may also better understand how I chose my name!
One Grain of Rice
If you want to have the story read to you on Youtube, here is the link.
Here is another teacher reading One Grain of Rice.
Summary of the Story
If you have not read the story for yourself yet, here is a basic summary…
Long ago in India, a greedy raja, whose province was largely comprised of rice farms, decided he would take and store all of the rice for himself. He convinced himself that he was doing it for the greater good and would then return the rice when times of famine descended.
Then, times of famine descended. The raja reneged on his promise.
One day, during this famine, the greedy raja ordered a feast for himself (Of course he did! Why wouldn’t he?). As the elephants were transporting the large quantities of rice from the storehouse to the palace, a village girl, Rani, noticed that some was spilling from the baskets.
Rani is our very clever protagonist.
She collects the rice in her skirt. Rather than keeping it, she returns it to the raja.
The raja, still fashioning himself as magnanimous, decides to reward Rani for returning “his” rice.
Rani simply requests one, yes one, grain of rice as her reward.
The Raja, wanting to feel benevolent, and perhaps looking down somewhat condescendingly on Rani, insists that she request more than one lowly grain of rice.
The trap was now set. If he insists right?
Rani changes her request. She still asks for the single grain of rice, but she asks that the quantity double each day for 30 days.
On day 1, one grain of rice. Day 2, she’d get two grains of rice. Day 3, she gets four grains of rice. Day 4, eight grains of rice and so on until day 30.
The raja, not suspecting a thing, and a little perplexed by such a modest request, agrees.
That very day Rani got her first grain of rice. Then she received two grains of rice, then four grains, and then eight grains in each successive day. Each day it doubled.
By the ninth day she received 256 grains of rice. All told this made 511 grains. This is only enough for a small handful of rice. The raja pitied her and her simple mind for only getting a small handful of rice after 9 days.
On the 13th day she was given 4,096 grains of rice. About one bowl. Now is when the numbers start to get very interesting and the power of doubling begins to unveil itself.
Day Sixteen – 32, 768 grains of rice received. That’s about one full bag. The raja begins to take notice, but is still not concerned.
Day Twenty-One – 32 bags of rice collected. That’s1, 048, 576 grains of rice or about one basket.
DayTwenty-Four – 8 baskets of rice received. 8,388,608 grains of rice. That’s 256 bags of rice.
Day Twenty-Seven – 64 baskets of rice were carried by 32 Brahma bulls. The raja is now officially troubled as the reality of the request begins to dawn on him.
Day Twenty-Nine – Rani was given the amount of rice equal to two royal store houses.
Day Thirty – The final day! 256 elephants (all pictured in a foldout section of the book) were needed to carry the contents of the final four remaining store houses. That’s 536,870,912 grains of rice! All told the total adds up to over 1 billion grains of rice.
Defeated, the greedy raja found himself completely out of rice. Rani distributed the rice back to the people of the province. She also gave a basket of rice to the raja. She made him promise that, from here on out, he will only take the amount of rice that he needs.
Humbled, the raja agreed. From then on, the raja becomes truly fair and just and the people live happily in his province.
The end.
Take-Aways from the Story
Besides wondering how possible it is to accurately count out so many hundreds of millions of grains of rice in the final days, there are a few powerful math concepts we can take away from this story.
These math concepts, when applied to our own personal finance, can begin to illustrate how we can retire much earlier than you may have been planning.
First Take-Away: The Power of Doubling!
Even knowing the outcome of the story, I am still always impressed with how quickly and massively those numbers grow. Starting with numbers like, 1, 2 and 4 it’s hard to imagine that, by the end of only 30 days, the number will be 536,870,912.
I want to harness the power of doubling with my own personal finances. Teachers that do so can get on the fast track to early retirement. But accumulating wealth is only one of the ingredients for personal finance.
We will get into all of them more thoroughly in future posts!
Second Take-Away: Little Amounts can Add up Quickly!
This speaks for itself. However, understanding this concept and actually applying it are two different things.
How many times, like me, have you marveled at how inexpensive an item is on Amazon? Then, like me, you mindlessly click “Buy Now” and go about your business until the package arrives a few days later?
One idea I hope to illustrate with this blog is this: Just like the rice, small amounts of money, when properly harnessed, can add up to large, life-changing amounts.
Take-Away #3 – An Introduction to Compounding Interest
The story doesn’t directly address Compounding Interest. But when you are discussing doubling your money, compounding interest is very much a catalyst.
Compounding interest is a driving force behind what makes our money grow and double more rapidly.
I will go into this more in-depth in the next post. And honestly, it’s not essential to understand. As long as my money is growing, you can tell me it’s magical elves right?
Essentially, though, it’s what happens when you earn interest on your interest.
If you earn 8% interest per year on $100, then after one year you’ll have $108 right? The next year you earn interest on the $108 so you earn interest on the previous year’s interest in addition to the initial $100.
Stated another way, the interest you earn on the $8 from the previous year is the compound interest.
It sounds small, but over time, we’ll see it can add up to huge amounts.
Lesson #4 – An Introduction to the Rule of 72
I will also discuss this in another post. It is directly related to Compound Interest.
The more times I see something the better I understand it. I’m hoping that it helps you as well.
Essentially, this rule tells you how quickly your money will double.
If you know how much interest you will earn, this rule (really it’s a guideline) tells you how many years it will take your money to double.
How it works:
72 ÷ interest rate = years to double
Always start with 72. Then divide by the interest rate you will earn. The result is the number of years it will take your money to double!
Example One: In the 80’s, I had a bank account that had an amazing 8% savings rate.
At that rate, my money doubled about every 9 years.
72÷8 = 9 (years to double)
Example Two: If you have a 12% interest rate, about how long would it take your money to double?
72÷12 = 6 (years to double)
It would take 6 years for your money to double at an interest rate of 12%
This is the rule of 72, and is a very helpful rule to know in the world of personal finance.
In Summary
Rani understood the massive power of doubling and she used her understanding to outwit the raja.
Afterall, who would suspect that measly sums of rice such as 1, 2 and 4 could ever amount to store houses filled with rice?
This story perfectly illustrates the power of doubling, and hopefully shows how beneficial it can be to apply it to our personal finances.
Maybe, like me, you suffer from teacher burnout? Maybe you just want to direct your life energy in other ways? Whatever the case, harnessing the power of doubling can drastically change your retirement outlook.
And if, like me, earning your full teacher pension after 30 years was too daunting, perhaps you can cut number down to a much more manageable number.
That might give you a little hope. It certainly did for me.
Thanks for reading everyone. Please don’t hesitate to contact me or just leave a comment below. I’m very happy to try to help a fellow teacher (or anyone else for that matter) and will do my very best to do so!
Compounding interest has such a monstrous impact on a teacher’s financial outlook that it’s worth an entire post on its own. You don’t need to understand it, but if it’s going to allow us to retire early, it’s probably worth a look.
Perhaps more importantly, knowing about its power will probably change your relationship with money. It certainly did for me!
In the last post, we referenced compounding interest and it’s impact on doubling your money. Give it a look here, if you haven’t already, then come back.
It probably goes without saying but the more times you double your money, the faster it grows. Compounding interest is the catalyst that gets your money doubling at a much higher rate.
Example of Compounding Interest
Here’s an example of compounding interest with numbers just to let us see it and understand it better.
On average, and for the purposes of this example, invested money returns about 8% interest per year. That’s the rate we’ll use.
That means if you invest 100 dollars. After the first year you would have $108 dollars. The second year however, you would NOT have only 8 more dollars (or $116 total).
Watch Compounding Interest do it’s work on $100!
Why? Because of compounding interest! You also are earning 8% on the 8 dollars of interest you earned last year. In the second year, you earn 8% of $108.
Instead, after year 2, you would have $116.64.
I know what you’re thinking. You’re thinking, “Yay! 64 more cents! Let me throw a flipping parade! I’ll pay off my mortgage and my student loans in one fell swoop. I’ll book a flight to Tahiti and buy one of the neighboring islands while I’m there! Hooray for the Teacher Double! Let’s hoist him on our shoulders and celebrate him!”
Are you done? Can I finish?
“What ever shall I do,” you continue, “with the money left over after buying the island with the 64 cents I earned from this magical sorcery we call compounding interest? Perhaps I can end world hunger? Or maybe I should provide the necessary infrastructure to all countries in need throughout the world? Maybe I’ll do both?”
Really? Can I go on yet?
Thank you. Bringing us back and fast forwarding a bit, we’ll see compounding interest start to take effect.
Back to the Facts!
Essentially, after 9 years of compounding interest your money will have doubled to $200. Without compounding interest it would equal $172 for a difference of $28.
And before you go off on another sarcastic diatribe, let’s forge on. With compounding interest your money doubles every 9 years. Without it, it takes 12.5 years. That will prove to be crucial over time.
After 18 years, your money, with compounding interest (CI), has doubled again to $400. Without it, it’s $344. I know, not very compelling. But remember the raja from the story in the last post! We need to keep doubling to see the power of it!
Check out this table below on the effects of Compounding Interest (CI) over time.
Time in Years (# of Doubles with CI)
Amount with CI
Amount w/out CI
0 years (0 doubles)
$100
$100
9 years (1 double)
$200
$172
18 years (2 doubles)
$400
$344
27 years (3 doubles)
$800
$416
36 years (4 doubles)
$1,600
$488
45 years (5 doubles)
$3,200
$560 (slightly over 2 doubles)
$100 over time (at 8% interest rate) with and without Compounding Interest (CI)
As you can see the effects become more dramatic over time. It turns out time is another key ingredient that works in conjunction with the compounding interest.
The more time, the more we double.
By the end of the table there is an appreciable difference between the two figures. The one with compounding interest doubled 5 times compared to just over 2 without it.
Now let’s look at, through the eyes of a teacher, what happens when we put more than $100 to work.
A Teacher’s Reaction to A Compounding Example
Last school year, somewhere after the time I decided I was too burnt out to continue teaching, but before the school year ended, I discovered the FIRE (Financial Independence Retire Early) movement and it changed my whole outlook on my career.
Understanding personal finance has given me hope, which is no small thing!
Now, rather than burning the candle on both ends for 18 years until I reached my full retirement, I suddenly had a vision to be able to retire in 5-9 years (if that’s what I wanted to do).
I was so excited about it that I organized a few gatherings with my colleagues to hash out some ideas. In one of the gatherings we talked about compounding interest.
I kicked off this meeting by giving one of my colleagues, Mary, a hypothetical situation. Mary’s that tough-love, no BS, kind of teacher that students’ respect/love and her fellow teachers adore. She’s also a ham and was nearest to retirement (mid 50’s?). In short, I thought she’d be a good candidate for the little scenario I was about to give her.
It turns out she was a perfect candidate. There is no way I could capture the brilliance of her performance in writing. A summary will have to suffice, but see if you can envision it.
The Hypothetical Comes to Life!
I called Mary up to the front of our meeting and gave her a hypothetical scenario.
The scenario was this: Mary, Imagine that you are able to go back in time and observe and interact with your 18 year-old self. On that particular day, a stranger comes and presents your 18-year old self with 2 manila envelopes. One of the envelopes, the stranger explains, is stuffedwith $10,000 cash the other contains a check made out for $250,000 that can only be cashed once you turn 60. You see your 18-year-old self reaching for the envelope of cash. What do you do?
Her Reaction?
Mary was angry with her former self!
Immediately, Mary’s face got red with anger and her eyes flashed with fiery madness.
“YOU EFFING IDIOT!” she screamed at she grabbed her imaginary self by the ear and started dragging her around the classroom.
Afterwards, most people would swear that they could actually see this imaginary 18-year old Mary being taken to task.
“What the eff are you going to do with that money huh? ” she continued. “Are you going to buy ‘cigarettes and cool clothes and drinks(the drinking age was 18 then)’ for all your friends? Huh? Answer me!”
And she was off! She continued verbally berating and eviscerating her former self before our very eyes. She may have blacked out with anger and forgot we were there. I’m not sure, but it certainly went on for a while.
Finally, her voiced softened to a creepily sweet tone as she stroked the hair of this imaginary being she knew so well. “Or maybe you just want a car? Is that what you want dear? Do you just want to fit in and feel accepted by your friends and you think a car will do that for you right?”
Imaginary Mary sadly nodded her head (I swear it!).
“WRONG!” she exploded. “Now get your butt over there and grab that check or I will smack you into next week!”
After things settled (it took a while!) the point was right there for the plucking…
What’s the Take-Away?
Ultimately, I think the main take-way is this: The financial decisions we make today, have a monumental impact on our financial future.
Mary might have said it like this though: “Don’t spend your money on frivolous crap. It’ll come back and haunt you later.”
The financial decisions we make now can lead to very different financial destinations later!
Either way you say it I think the math supports it.
Call up any compounding interest calculator on Google. If you put in $10,000 and let it grow at 8% interest (the average rate of return from the market) for 42 years (from Mary’s 18th year to her 60th year) you will have over $250,000 sitting there.
That’s no small thing! And remember Mary’s reaction? It was visceral and it was palpable! She knew her younger self would squander that money away leaving her less options later.
In a matter of minutes, Mary taught us an essential lesson through her past financial mistakes. I want to learn from those so I don’t have the same regrets later.
Take Care of your Future Self!
I think it’s absolutely imperative to look down the line at our future selves and try our best to take care of that person. Teaching is a demanding job, and if the conditions are not favorable, it can take a heavy toll on us.
I’ve found it exceedingly helpful to be able to take a step back this year and regroup. Essentially, rather than buying material goods with my money, I am buying time.
Look after your future self when making financial decisions!
This idea of “buying time” is definitely worth a future post that I’ll link to here when it’s done.
For now, I hope that the example (10,000 turning into 250,000) illustrates that those little amounts really can add up to huge sums.
But here’s the thing! In that example the person only did a one time down payment of $10,000 and never added to it again!
What would happen if we added even more to it each year as our salary increases? Hint: The number will be a lot bigger! We’ll do specifics later as well.
And just to be clear, I just came to this conclusion mere months ago. That means my past is littered with spending regrets. You simply can’t go down this road without regrets and you can only change the decisions you make moving forward. Don’t sweat it. You’re in good company!
I hope this post and the future ones help to illustrate the power of saving your money and submitting it to the massive power of compounding interest.
Thanks for reading and, as always, I’d love to hear your thoughts on the matter. All questions and comments are welcome below!
