Passive Investor Tips is a weekly series hosted by full-time passive investor and Best Ever Show host, Travis Watts. In each bite-sized episode, Travis breaks down passive investor topics, simplifying the philosophy and mindset while providing tactical, valuable information on how to be a passive investor.
In this episode, Travis explains that there are two sides to the coin when it comes to money: saving and investing. He illustrates the importance of both sides and the downside of focusing only on saving while neglecting to invest.
Side 1: Saving & Personal Finance
Growing up, Travis had frugal parents who taught him how to save and manage his personal finances well. He learned how to avoid accumulating debt and spending money on unnecessary purchases.
He uses an example to illustrate the power of saving: Say at age 25, you make $10,000 per month. $2500 goes to taxes, $1500 goes to rent or mortgage, and $2,000 goes to other living expenses, leaving you with $3,000 left over each month to save. By age 65, you will have saved $1.4M.
Side 2: Investing
While the example above seems like a good plan, it doesn’t take lifestyle expansion into account — for example, upgrading your car or home, or increases in rent or property taxes. It also fails to take inflation into account. The value of that $1.4M you saved won’t be the same 40 years from now as it is today.
If, however, you choose to invest $3,000 per month for 40 years at an 8% annualized return, you would come out with just over $10M.
Why You Need Both Sides of the Coin
While saving money is undoubtedly important, it won’t get you far unless you invest what you save. If you can’t manage your money, you will inevitably end up in debt. However, if you don’t invest, you will be unable to expand your means and your lifestyle. Learning to do both is key.
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Travis Watts: Welcome back, Best Ever listeners to another episode of Passive investor tips. I'm your host, Travis watts. This is a short series that I'm doing dedicated to the passive investor. You can think of it as maybe free training or a free course; it's all topics related to investing, personal finance, strategy, and so on. And in today's episode, what we're talking about are the two sides of the money coin. So you've got personal finance and/or saving, and then you have investing.
I'll share with you a real quick story. I was raised by two very frugal parents who did a fantastic job at painting one side of the money coin for me, which was the saving and the personal finance; they taught me how to save money, buy the off-brand, shop for sales, don't buy things you don't need, stay out of debt... And while I truly appreciate those lessons even more so in adulthood, there came a point where I started to realize that real wealth isn't built this way. I learned that there's another side to the coin, and it's called investing. And this side of the coin is what allowed me to inevitably reach financial independence, and it's what allows you to be able to expand your lifestyle and expand your means.
Let me give you a quick example to paint this picture. Let's say that you only focus on one side of the coin, the personal finance and the saving. So we'll assume you make $10,000 per month at a job; you're a W-2 active employee, and we'll assume that you pay roughly 25% in taxes. We're talking about federal tax, state tax, social security, Medicare, things like that, that are auto-deducted out of your pay before you even receive your take home.
So if that were the case - and of course, I'm painting a very conservative example; it would depend on the state you live in and all kinds of other factors... But we'll say you're left with $7,500 take-home pay after that. So the next biggest expense that most people have is their housing. So we'll say you've got the frugality mindset, you're very diligent with your money, you're able to snag a low-rent apartment, or maybe you do buy a home and you managed to keep your mortgage fairly low. And we'll call that $1,500 per month. So at this point, you have $5,000 left of take-home pay.
Now, I'm going to take all other expenses and I'm going to lump them into one category just for this example. We'll say your bills, your utilities, your health insurance, your gas, your food, miscellaneous, and we're just going to wrap all that up and we're going to call it $2,000 per month.
So if everything goes perfectly every single month, then you'd be left with $3,000 in the bank, in cash. Now, this is the way that I was raised - be frugal, save your money, and have a little bit of cash in the bank. And the last thing that we'll assume for this example is that you start this process at age 25. So we'll fast-forward past -- assuming maybe you went to school or college or something like that... And again, to be conservative, let's assume you don't have any student loan debt, you don't have any other kind of car loan or credit card debt or anything to worry about, other than if you had the mortgage in that example. So if you were able to diligently sacrifice this way until age 65, and you deemed that age to be where you wanted to retire, believe it or not, you'd have $1.4 million cash in the bank, which sounds pretty good on the surface right? After all, you'd be a millionaire. But let me explain the downside to using just this strategy.
Break: [00:06:02.09] to [00:07:48.13]
Travis Watts: The first thing is it never allows you to expand your lifestyle, which to me is the biggest thing. What if you want to upgrade your car one day? It's pretty reasonable to think your car's not going to last you 40 years. What if you want to upgrade your home? What if your rent goes up? What if the property taxes and insurance go up on your home? And we know, reasonably speaking, these things are going to happen. What if you start a family? What if you have multiple kids that you have to care for? What if you lose your job one day? What if you get married and then get divorced and have to half everything up? This is simply called life. And these are reasonable things to consider in that example. But you know, one of the biggest wealth destructors despite all of that is called inflation. So that $1.4 million, 40 years from now, really isn't going to get you very far. And to paint that example, I was able to find an inflation calculator on bls.gov. BLS stands for Bureau of Labor Statistics; kind of a fun calculator if you're a nerd like I am, to kind of geek out. But I played around with this for the example, and what I did is I took $1.4 million in 1982 - and 1982 represents a 40 year timespan from then through today - and I wanted to see the buying power equivalent in today's dollars, and it turned out to be $4.3 million. What that means is, in today's dollars, you would need to spend 4.3 million in order to buy the same items you could have purchased the 1982 for 1.4 million. Or said another way, it's about a 200% inflation rate in that 40-year time span.
So the lesson to me is quite simple - saving your money having a little cash in the bank and simply being frugal isn't going to cut it. So let's take a look at the other side of the coin, which is investing. And truly, this is the exact opposite scenario as saving and being frugal. If you decided instead you were going to take that $3,000 in cash left over at the end of the month and invest it, or said another way, $36,000 per year, and you were to invest it at an 8% annualized return - I had to throw some example number in there - starting at age 25, ending at age 65, representing 40 years, you would have... Drumroll, please - $10 million. Actually, a little bit over $10 million. And yes, inflation still obviously plays a role, just like it did in the previous example, but here's the deal - the results are almost 10x. And to me, that's pretty astounding.
So the bottom line in this episode and the point that I'm trying to make is that you really need both sides of the coin. It's not a this versus that. It's a combination. Because if you can't manage your money on a monthly or a day to day basis, you're going to end up spending all your money or going into debt. And if you don't invest, then you won't have enough to expand your lifestyle and expand your means and be able to do the things you otherwise would have been able to do.
So with that, I'm going to conclude the episode "The two sides of the money coin." Like, subscribe, comment. If you haven't connected yet with me on social media, whether it's LinkedIn, bigger pockets, Instagram, Facebook, let's do it. Travis watts. Or @passiveinvestortips. That's my handle. And again, if you've missed some of these previous episodes that I've made for this segment, we're creating playlists on YouTube and bestevercre.com, so you can skim through the episodes. They're usually short, five to seven minutes. They're intended for folks in a hurry. If you don't have a lot of time, you're waiting on the doctor, or the dentist, you've got a short commute, you just want to tune in to the Best Ever podcast and have a quick snippet and something to think about for the day or for the week, I hope it's adding some value to you. Have a Best Ever week and we'll see you on the next episode.
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