Why The Stock Market Is Important To You
One of my great pleasures in life is going to the grocery store. Why? Because when a shopper puts Tide, or Coke, or Betty Crocker Cake Mix in their cart, I make money. I own a small piece of those companies and when they sell something they owe me a return on the investment I’ve made in them. You also own parts of those same companies and may not even know it. If you have a pension plan, 401(k), or IRA (Individual Retirement Account) you are invested in the stock market.
Those Evil Corporations
I know it’s hard to get your head around the fact that you are actually benefiting from those big, bad, evil corporations that are just out to ruin the little guy’s life, but it’s true. While you’re fast asleep in the middle of the night, someone is in the checkout line at Walmart buying a candy bar or pack of gum and you are making money on that transaction. Think about that the next time you’re six deep in the checkout line.
Stock Market Myths
- The Stock Market Is Gambling: Gambling creates no value. It simply gives money from losers to winners. Investing creates value. When you invest in a company you increase the overall wealth of the economy to everyone’s benefit. The stronger a company is, the better products and services it can provide to consumers and benefits to employees.
- The Stock Market Is Only For The Rich: Small investors can begin their investing with less than $500. Thanks to the Internet data and tools that were only available to high priced brokerage house are now available to everyone. Individual small investors have an advantage over big money managers. Those managers are under pressure to produce short-term profits and are often wrong more than right. An individual can leave money in place longer and reap higher benefits by waiting for companies to grow.
- Stocks That Rise Must Eventually Fall: Gravity affects a lot of things but the market is not one of them. On this date in 1993 Walmart stock closed at a little over $12.00, in 2003 it closed at just under $60.00 and in 2013 it closed at $72.00. There are no ironclad guarantees that just because a stock is going up that it MUST eventually fall.
Roth & Other IRA’s
Most IRA’s contributions are before tax money. In other words the money grows and you pay taxes when you remove the money when you reach retirement age. A Roth IRA is money you put in that’s left over after you pay your taxes so it comes out tax free — including whatever interest it earned over time. You have to begin removing money from a conventional IRA at age 70 because Uncle Sam wants his money. A Roth has no such stipulation since the taxes on it have already been paid.
If you put $5,000 in a Roth IRA for your child at age 18 and it could earn a modest 7% compounded interest, and you never put another dime in, your child would have $168,000 at age 70. Imagine what you would have if your child would make yearly contributions of just a few hundred dollars. At a 9% return with only the $5,000 investment you’d have $441,000 for retirement. A five thousand contribution every year at 7% — $2.5 million at age 70.
Money Is An Employee
You need to start thinking of money as an employee. If you earn it and spend it, it’s gone forever. But if you invest it in something that increases in value that’s like getting a raise for doing nothing but sacrificing some current material things you’ll never miss. And you’ll still have the original investment.
Your first goal is to make a plan to save $1,000 in the next 12 months. That’s 4% of your income if you make $25,000 a year. That’s 4¢ out of every dollar earned. Put 4-5¢ of every dollar in a savings account and leave it. It’s money that doesn’t exist. No matter what bill is due that money must stay put.
I realize it’s not easy on that income but it can be done and you don’t have to do it forever. But wouldn’t it be better to have that $1,000 earning money for you than having to re-earn it month after month? Where does that get you?
Some Final Thoughts
Compound interest is an amazing thing. Putting a steady amount of money away each year can have a profound effect on your lifestyle. While others are buying the big house and the new pickup trucks you should be renting and driving fully paid for used cars and saving the difference.
As I said before, you don’t have to live that way forever. But the longer you can live that way the better you will live down the road. Try to project how much money you will need to retire at a specific age and create a plan to make that happen. Living well in the present isn’t worth living poorly in the future.