Investing is an amazing way to build wealth. Arguably, it’s what separates the rich from the poor. Everybody knows that Bill Gates, Mark Zuckerberg, and Jeff Bezos invest their money. But is investing STILL as powerful when you’re not rich already? Does investing still yield great results if you start with little money? I’d like to argue: yes! My name is Jeff and I run my own personal finance blog Financial Pupil. In this post titled, The Power of Investing – Even With Little Money, I’ll be talking about money and freedom, sharing some analysis, and discussing why investing is so powerful (even with little money!) Let’s dive right in!
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Money and Happiness
Before we talk about the power of investing on little money, I wanted to briefly discuss how investing and happiness are linked.
The statement that “money doesn’t buy happiness” is absolutely true. If you’re a millionaire who has poor relationships with your family and friends and continually feels unsatisfied, you’re probably not very happy. That being said, statistics HAVE shown that people who have more control over their time are polled to be happier than those who do not. And what can buy time? Money.
This isn’t to say that money will guarantee happiness. Far from it. But money is certainly one piece of the puzzle. If you can have your investments or businesses bring in passive income enough to cover your living expenses, you will have achieved “financial freedom.” With this freedom, you will have time to do whatever you want. Having that time and freedom gives you a better chance of being happier.
There are many ways to build a passive income stream, but one of the best is through investing. You get paid to own stocks through dividends and can make money on your sell with capital gains. There’s really no better place to put your money if you want it to grow. Investing builds your passive income stream, which finances your freedom, which gives you the time you need to do whatever you want in life. Logically, it follows then, that investing could increase your happiness.
The Power of Investing With Little Money
At this point in the post, you might be thinking to yourself “that’s great Jeff, but what good is it if I don’t HAVE any money to invest.” This is where I’d say, “it doesn’t matter; almost any money invested has the potential to blossom into a LOT later on.”
Investing with little money is immensely powerful for 2 main reasons:
- Compound Interest
Everybody has heard financial experts talk about how “one dollar invested today is X amount in the future,” so that’s not what I’m going to do in this section. Instead, I’m going to run some quick and easy calculations on a compound interest calculator. I encourage you to follow along if you want here.
You’re a 25-year-old service worker making $40k a year and barely managing to make ends meet. Even though you’re struggling, you read some investing posts and get inspired to put some money away every month towards investing and building wealth. Cutting down on expenses and unnecessary items, you manage to save $10 every day and toss it into the stock market. You also take the hundred dollars you’ve saved up already and invest it. Assuming the stock market performs exactly as it has for the past 100 years, here’s how much money you would have in retirement:
- $100 initial investment
- $10 invested every day
- 8% return on the money
- 40 years of compounding (65 years old – 25 years old)
- The total amount at retirement: $968,496.26
- Interest earned: $824,396.26
You’re currently 35 years old and making a decent wage of $60k a year. You haven’t saved up money prior but are determined to start now. You manage to save 20% of your income every month by paying yourself first. Because you pay yourself first, you don’t even feel like you’re sacrificing anything. Here’s how much money you would have in retirement:
- $0 initial investment
- $1000 per month invested ($60k / 12 months x 20%)
- 30 years of compounding (65 years old – 35 years old)
- The total amount at retirement: $1,408,550.59
- Interest earned: $1,048,550.59
You’re a 40-year-old who has hustled hard in your chosen profession. You climb the ranks of your company and get promoted to a manager position which gives you $80k a year in salary. On top of that, you’ve also been diligent and saved around $5,000 up until this point. Now you start adding to the stock market. You also employ the “pay yourself first” model but are more aggressive and set aside 30% of your income for investing purposes. Here’s how much money you would have in retirement:
- $5,000 initial investment
- $2,000 per month invested ($80k / 12 months x 30%)
- 25 years of compounding (65 years old – 40 years old)
- The total amount at retirement: $1,852,224.29
- Interest earned: $1,247,224.29
These are some impressive numbers. As you can see, in almost every scenario above, the person ended with around or more than a million dollars in retirement. That’s enough to live off of for the rest of your life, financially free! Also, as you can see above, the numbers invested weren’t completely unreasonable. It wasn’t like these people were investing tens of thousands of dollars every month. They merely invested what they could and almost all ended up millionaires.
The Psychology of Investing
The second thing that makes investing so powerful are the psychological effects of it.
Generally speaking, people who start investing tend to want to invest more and more of their money. This occurs because once you make money through investing, you never view a dollar the same. Every dollar is a tool that can be put towards your investments which will help them grow. Every dollar spent is another lost opportunity.
Once you make a little bit of money investing, you’ll psychologically be motivated to save more and invest more. This will (most likely) yield even greater investment results and the cycle will continue. It’s an ever increasing investment circle!
Now imagine those three scenarios above, but with continually increasing additions to the monthly investment number…. you’ll walk away with mind-blowing amounts of money.
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Final Thoughts on The Power of Investing with Little Money!
Start Investing Now!
Investing is undoubtedly a powerful way to build wealth. Almost anyone who starts at a relatively young age can retire with a stash of over a million dollars if they invest. “But Jeff, what if I have no money at all to invest?” That’s possible, but before you jump to that assertion, consider these items:
- The money you spent eating out
- Your subscriptions eating away at your monthly cashflow
- Your free time which could be spent hustling for more money
- The money you spent on clothes
- The money you spent on living in too expensive of a place
After considering these expenses, you should manage to scrap up at least a LITTLE bit of money. And as we have just shown in this post, even a little bit of money can go a LONG way in the world of investing. So, get out there, and start building your wealth!
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Jeff is an avid reader, writer, and golfer who enjoys cooking in his spare time. He is obsessed with all things finance-related (personal and otherwise), and is currently working in private equity. He also runs his own blog which you can check out here at Financial Pupil!