Why You Should Invest Your Money
Since a few years back, I have been convinced that investing money is a good thing to do and that I want to do more of, and here I’ll put forth some of my reasons for why.
The topic of investments is based on the topic of money, and money is a controversial topic, where each person has their own ideas and beliefs of what it can do for you ranging from “money doesn’t make you happy” to “money makes you happy”, and “caring about money is responsible” to “caring about money is greedy”. Whatever is true here, the problem I am trying to solve with this text is the problem of “How do I become more efficient at earning the money that I want?”
Earning money with your time vs earning money with your money
The most common way to make money I would say is by offering your time to someone, and in return get money, this is what you do when you have a full-time job, which is how most people that I know get the money that they need. But instead of using your time to get money, there is another resource that you have, and that you, much like your time, can use to get more money, and that resource is your money itself. Now you might have the conviction that that “no, money is for spending”, and that is partly true, but then you miss out on the important fact that money is good for making more money as well, with the easiest example of it being that you can lend your money someone who needs it and get interest, aka extra money back on it. This you can easily do by putting them in a “savings account” in your bank. This might sound like something only for the rich, but I oppose that claim, you can invest 10 dollars, and I recommend that is exactly how you start if you have not done it.
So if you see your money as a resource that you can use to make more money, it might become clear why stocks are so good, because with it you can stop using your time to make money, and instead use your money to make money, and spend your time on other things that you want to spend it on like being on the beach or hanging out with your friends
So exactly how good is your money at earning money, really?
I guess that this was not completely new to you, but to really understand this, I think that what is important to know this on a more quantitative level, but which I mean to not only know that “my time can be used to make money, and my money can also be used to make money”, but also to know “actually how good is my time at making money, and also actually how good is my money at making money, and how do they compare to each other? And for example to know “how much money do I need to invest, to make as much money from it as I do with my time at my full-time job?
So here I will give you an example with number that I think are reasonable and end up with and answer to the previous question, but although I think that they are reasonable, I expect you to have your own opinions on them, and if you do then i encourage you to do the same calculation but with with numbers that you think are more reasonable, or that corresponds to your life better. Here I will state my numbers clearly:
- A monthly salary: 35 000 SEK=3 500 dollar/euro
- Tax on your salary: 25%
- The return on a savings account per year (no variance involved): 3%
- The expected return on stocks and funds per year (variance involved): 8%
With these numbers, you will get 35 000 * 0.75 * 12 ≈300 000 SEK per year from your job.
If you want to earn the same amount of money from a savings account, you will need around 300 000/0.03 ≈10 000 000 SEK = 10 million SEK on that savings account.
If you want to earn the same amount of money from stocks and funds, you will need 300 000/0.08 ≈4 000 000 SEK = 4 million SEK invested in stocks and funds.
So to get a full time salary, you can either:
- Spend the time at a full time job indefinitely
or - Own 4 million SEK and have them invested indefinitely
I think it’s good to know roughly “how good” money is at generating money, and to compare that to how good your time is.
No matter what your conclusion is here, ranging from “wow, that’s an absurd amount of money, I will never be able to get that”, to “ah, that is a lot less money that I would expect, I can gather that for myself”, I still think that this “fact” is good to know about, to have a clearer understanding of different ways to earn money.
And if you are like me when I first realized this, you react more like the last statement, being optimistic about the possibility. The way I see it is that the 4 million SEK, or whatever number you come up with, is huge. But the time that I have left to live is also huge, and if I compare them subjectively, the time feels even huger to me! This inspires me to try to get there, not to live a life of luxury, but instead to live a life where I can put my time on what I want to put it on, without the big constraint that i also have to make the money i need, to “solve my money problem” once and for all, instead of working for it 8 hours every weekday indefinitely for it.
Okay cool, now how do i get there?
To get this, it will take you…
A note on mindsets
I think that having the mindset that “only rich people do investing ‘’ can be a big blocker if you don’t consider yourself to be rich. How much money you make from investments will be proportional to how much you invest, which means that you will always earn something from it, and the more you invest, the more you earn. Therefore, I would recommend you to start investing today if you are not already doing so. And have the goal that throughout your life until you don’t need more money, make it grow, which it does automatically, but also by depositing money that you earn in other ways.
Another thing that i want to note is, as you can see, I judge stocks and funds to have better expected return, but that comes at the cost of not being certain, so you can both get more money and less money in the end. This is fine though, especially if you invest for a long time, then there will be less variance, and I think that it is good to learn how to handle risk with good expected value.
To make this text actionable for you, I recommend you to download the Avanza app, create an account and deposit SEK 500 and invest it in the free index fund called Avanza Zero, and start your investing journey from there, and from that point on and until the end of your life, identify yourself as an “investor”!
I hope you liked this, and I wish you all the best. Felix Mattsson
If you are interested in the part about investing with variance, which stocks are the best example of, and how to handle that variance, then I highly recommend this video about it that I really liked, to be more comfortable with leaving things to chance when you are convinced that the expected value is positive
