Give Your Money Time To Grow
Try this question out on your friends – or your children.
If you were to choose to get either $1,000 a day for 30 days or a penny on the first day and then double your money every day for 30 days, which would you choose?
Most people will begin to silently add up the numbers. They get to about day 10 or so, when the amounts would be $10,000 and $5.12 respectively, and then opt for the first offer, totaling $30,000.
A few people figure it’s a trick question and reflexively choose the second option.
Very occasionally will someone double the pennies on paper. When you do, you realize that in 30 days you will have amassed $5,368,709.12!
Why do people quit playing this game before finding out where it might go? Is it because we prefer instant gratification instead of what money can do over time?
Related: Delayed Gratification
We don’t respect the small amounts of money enough to believe that they can grow into a fortune.
Do you fritter you money away heedlessly? Do you go for the bargain at the mall instead of socking away an extra $50 in a savings program?
Do you automatically say no to spending, thereby valuing money itself more than what it can do for you?
When you let emotions and reflexes govern your behavior with money, you almost always fail to act in your own best financial interest.
You don’t have to be a financial genius to make your money grow. Time devoted to considering you financial decisions is essential.
Do you stash your money where it’s most convenient or follow the first piece of advice you hear? Don’t act too hastily or wait too long.
Related: Paying The Price For Financial Procrastination
What is your risk tolerance? Really?
Susan has inherited $10,000 that she wants to use towards a down payment on a house. Where should she invest it until it’s needed?
A reliable vehicle for keeping short-term money safe is recommended. But she is doubtful. “I want to get a good return and a high interest savings account only pays 2%,” she says.
Financial advisors will ask investors to choose between two options. Here’s an example:
- An 80% return on their money the first year but a 40% loss the second year, or
- A 5% return the first year and another 5% return the second year.
Almost without fail people will choose the first option, figuring that if they earn 80% the first year and lose only 40% the second they still would have a 40% gain. Right?
Wrong. An 80% gain on $10,000 is $8,000 for a total of $18,000 after the first year. The next year, the loss is 40% of $18,000 or $7,200 for a total of $10,800.
Now look at the return on the other choice. 5% of $10,000 is $500 for a total of $10,500 after one year. 5% of $10,500 (we’re compounding here) is $525 in the second year, for a grand total of $11,025.
Distinguish between short- and long-term goals
People see the above illustration of the idea that if you just plod steadily along you will come out ahead. But that’s not always true. If you have a long period of time before you need your money (more than 5 years), you are better off investing in the stock market.
When you have a limited amount of time (one to three years) you don’t want to take the risk that any of your money will be lost.
Related: The Best Time To Start Saving Is Now
Research shows that stock investors have a 28% chance of losing money during any one given year, but over 10 years that risk falls to only 3%, while the average gain totals more than 10%.
Conclusion
As I mentioned above, you don’t need to be a genius to make your money grow. Make a timely decision instead of dithering away because you don’t know what to do or want to time the market. Be honest with yourself about how much risk you are comfortable with.
Related: Financial Literacy Is A Lifelong Pursuit
Don’t risk short-term money because you deem the returns too low. But don’t shortchange your future by not giving your money the time it needs to do all it can for you.
>>>If you have a long period of time before you need your money (more than 5 years), you are better off investing in the stock market.
Repeat that out loud :). It’s important.
So the next question is, if you’re 65 and investing your retirement savings for a life expectancy of say 85-90 (so more than 5 years), shouldn’t we be investing in the stock market?
@LifeInsurance: To answer your question – I say absolutely! The common idea that you should automatically switch your stocks to bonds when you reach 65 is ridiculous. If you have amassed a well thought out portfolio of dividend stocks, you’ll have income regardless of market fluctuations.
Keep a portion of your money in relatively liquid investments. You’ll know how much based on your desires and fears and what your comfort level is.
This is such sage advice. So often I look at things that happen on a short term basis and get frustrated, but if I take a look back, at twelve months, twenty four months, sixty months…and compare, the results are usually quite staggering. People are so into short term focus that they lose sight of the fact that building wealth and stability requires long term focus and attention.
@Money Beagle: It can be discouraging when you think that small amounts don’t add up to much. That’s one of the reasons why people who think they can’t afford to save 10% of their earnings just don’t bother with saving at all.
It pays to think of the long term but you can set shorter term goals (as in life). If retirement seems a long way off, think of the tax refund you’ll get. If you imagine yourself on your dream vacation you may decide to put $50 into your fund rather than spending it on yet another blue shirt that will blend with the others in your closet.
As you say, you need focus and attention.
I agree with the comments made about delayed gratification and wanting to to see results now. I know I have a hard time passing up the clearance racks. I have worked very hard to make a list though of things that my wife and I might actually need or use before we hit the sales now. It helps. But, when I think of all the little bits of money here and there that we could have put toward savings and investing the amount that adds up over the years is quite astounding.
@James: Your idea of creating a list of what you need is a good one. Sales are very tempting, especially if the discount is substantial. But even 90% off something you don’t need is still a waste of money.
I’m not saying you should save every cent, but if people were more conscious of what they spend they could reach their goals a lot faster.
Investing over time has a huge payoff! Unfortunately, most people wast or squander the first ten years or more. Time will counter your mistakes, the amount you invest and so much more.
@krantcents: That’s why it’s best to start saving early, even if it’s only a little. Learn from the boomer generation who are now trying to make up for lost time and have to sock away huge amounts (if they can), or take unnecessary risks to get what they want.
Thanks for this timely article! We need to be better about investing for the long term. We’ve missed a few run-ups in the markets because we took profits and sat on the sidelines.
@Mandy: One of the worst things to do is to sit too long on the sidelines while trying to figure out what to do. Being undecided can lead to missed opportunities.
Assuming very high interest rates tends to create false intuition – here you’re assuming 100% DAILY simply interest on the penny. I realize it’s just a thought experiment, but it’s not an experiment that prepares people to operate in a zero risk+inflation adjusted return environment like we have now.
@W at Off-Road Finance: I think you’re missing the point of the story. It has nothing to do with interest rates. The important part is the third paragraph – people give up to soon when small amounts of money are involved because they don’t think it will be worthwhile.
When my first child was born I received $16 a month in universal family allowance benefits. I deposited this into a savings account and continued this practice for each of my children. It was slow going but when the savings balances reached decent amounts I could make other investment decisions. Nowadays there are many more investment and savings options for small amounts. That $16 could easily have been absorbed into our family budget but instead each child received a fairly decent sized cheque when they finished school.