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Return on What, Now?

Investment.  It's a big scary word that conjures images of top-hatted carpet-bagging bankers with cartoon dollar signs above their heads, and it shouldn't.  It sounds like the sort of thing that's completely out of the reach of The Common Folk, but it isn't.

I wrote this in my head a month ago and should have written it down here then.  I started thinking about investing years ago but didn't earnestly start until fifteen months ago.  Don't procrastinate this one, bucko.

There are many forms of investment, and I'm going to talk about hardly any of them here.  Instead, what I'm going to cover in these next paragraphs is the fundamental concept and the mindset you should have in approaching that concept.  I'm talking to you, me from 20 years ago, and I wish you'd have the sense to take your own advice because damnit, you do know what you're talking about.

First and most obvious in terms of investment is that it need not be monetary.  Parenthood is a huge investment in the future, the returns on which are immeasurable -- you're here because of it, right?  That said, everybody thinks of money or things that originally cost money when they think of investments.

The biggest key to successful investment is patience.  Get rich quick is great if you can do it -- write me a big ol' blog series on how you pulled it off, because I haven't figured that one out.  Everybody else does it over time, whether it's baseball cards or stamps or mutual funds.

Why start now and be patient?  Let's put together three hypothetical examples:

Piggy Bank

  • $10
  • $10
  • $10
  • $10
  • $10
  • $10
  • $10
  • $10
  • $10
  • $10 

Savings Account

  • $10
  • $10
  • $10
  • $10
  • $10
  • $10
  • $10
  • $10
  • $10
  • $10

Money Market

  • $10
  • $10
  • $10
  • $10
  • $10
  • $10
  • $10
  • $10
  • $10
  • $10

In each hypothetical example, every bullet is a contribution (an investment) to the example's money storage, in some unspecified period of time.  What's missing?  The return, of course.

Let's start with the piggy bank.  After 10 deposits of $10 each, that bank has $100.  Doesn't matter if that was one deposit a minute or one every 5 years, at the end of those deposits it's $100 and 100 years later it's still $100.  Your return is exactly what you put in -- you didn't lose any money and you didn't spend any money.

Now, let's try the savings account.  Let's take two versions of that one, but instead of every minute or every half decade, we'll treat one as a month and one as a year.  We'll also do this at a hypothetical bank that has no fees or minimum requirements and pays 1% interest annually.

Version one of our investment schedule has a new account in February (what, I have to start in January?) with $10, then $10 more in March, April, May, June, July, August, September, October and finally November, at which time we have $100 in the bank.  If we let it sit there and our fictional bank pays its hypothetical interest in mid-December, then you have $101 in time for Christmas.  Ten years down the road, you have $111.57 in the bank, and you didn't have to do anything but wait patiently.

Version two of that schedule gives you $10 that first year.  After your second contribution but before that second year pays its interest, you have $20.10.  Next thing you know, you're up to $30.60, then $41.01, then $51.52, $62.14,  $72.86, $83.69, $94.63 and in your tenth year of steady $10 investments you have $104.63 until that last interest payment brings your total to $105.67.  It's not $111.57, but it's not too far off, and it's respectably more than that piggy bank had.

Now, I am going to give you yet another FFI (fictional financial institution) with money market rules that arbitrarily work like so:  Under $100 balance, acts like savings account with 1% savings rate; once you break that magical $100 mark, it pays 2%. In THAT account, investing just the same as in the savings account, our balances (returns) look like so:

The February through November run-up to $100 gives us $102 by Christmas, and has us sitting on $121.90 a decade past that.  It may "only" be $10 more, but that is one entire investment unit.

The $10 annual investment works just the same years one through nine, with your $94.63 balance, but that final investment of $10 puts you at $104.63 and an end-of-year interest payment boost to $106.72.  If you're wondering why you didn't just go ahead and spend those first nine years dropping the money in savings and then moving it all plus your last investment into the money market, you're ahead of the game -- you've just gotten around the hurdle of coming up with that minimum balance, faster than you could have using your piggy bank.

Let's go back for a minute and equalize those:  Each bullet point is a $10 investment happening on a monthly basis, and you only do this for ten months.  Then you sit on your investment for three years.  What's your return?

  • Piggy Bank:  $100.00
  • Regular Bank:  $103.03
  • Money Market:  $106.12

When you start to factor in things like $20 investments instead of $10, and monthly contributions going on for years instead of months, and waiting for decades instead of years, you see how powerful a simple thing like this can become.  If at age 19 you drop $20 a month into a non-piggy bank, which pays 1% interest, and you keep doing that until you are 25, you've invested $1,440 but your balance will be ... I am going to cheat and introduce reality into this equation.  Banks don't pay interest annually, they do it monthly.  That $1,440 investment over those six years would, if it could be maintained and sustained, leave you with a savings balance of $1,485.69.  Ten years later at the ripe old age of 35, if you just let that sit, your balance would be $1,641.95.  $156.26 isn't a ransom, but it's a pretty good return for sitting on your fanny for ten years.  That, by the way, is over $200 more than if you'd stuck the same money into a mattress or a piggy bank and gone to check at age 35.

That's what we mean by return on investment, and patience being a large part of that return.

A "real" money market as I write this has a minimum balance over $1000, and bumps its rates at ever-widening balances, but work with me -- doubling the rate in this "real" account happens from (say) $8,000 to $100,000 (the interest on $100K is double the interest on $8K), so it may not be as immediate as a cut from $99.99 to $100.01 but it's also not out-of-the-question.

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