This is a guest post to to help kick off Operation: #investNOW where I’m inspiring 1 million people to start investing in themselves. This post comes from Barbara Friedberg of BarbaraFriedbergPersonalFinance.com
Never Before Told Personal Investing Story
When my husband and I were first married we were on an extremely tight budget. We relocated from Ohio for him to go to a very expensive graduate school, and I had no job!
Eventually, I got a job as a career counselor and student affairs administrator at San Diego State University.
His tuition was about 1/3 of my gross salary. Fortunately, we had some savings to help with expenses.
This story explains how we managed to invest on a small salary, and ultimately grew our initial investment over 6 times.
The Investing Crucible
My first introduction to the 403(b) was through my employer. I made the decision to contribute the maximum allowed by law, even though I knew we couldn’t live on the rest of my salary.
I’d be lying if I said we didn’t miss the $800 per month retirement plan contribution, because we did.
And we couldn’t have done this had we not saved up a bit during the previous years to help tide us over.
Was this crazy or not?
My thinking was, I would dip into savings in order to meet our living expenses if necessary, and we would live as cheaply as possible.
We didn’t borrow for my husband’s tuition and we paid our credit card off in full every month. During those first two years of graduate school, before my husband started working part time, times were tough. (Side note; one year we were on a game show and won enough to pay for one year’s tuition)
Our entertainment consisted of pot luck dinners with our friends or happy hour at the local Tio Leo’s where one drink entitle you to a nice buffet of chicken wings, tacos, and snacks. That was our dinner. We rented movies for $1.00 at the video store (yes, back in the day, you had to go to a store and rent a movie).
There were plenty of months where we dipped into our savings because we transferred $900 per month from my salary into our TIAA-CREF 403(b) and my gross salary was only about $3,000 per month. As my salary increased, I increased the account contribution to the maximum allowed by law.
The Investing Payoff
My employer did not contribute to this account at all.
Since the early 1990’s until today, the account increased 6.38 times. Every dollar I contributed 20+ years ago is now worth $6.38.
After I left this job, I never contributed to this account again. As a matter of fact, I didn’t even change the asset allocation of this account which was 25% invested in a TIAA fixed return annuity and 75% in the CREF stock fund.
Notice the 14.4% return from January to September, 2013. That was lower than the return we would have earned had the asset allocation held more stock investments and less fixed. But for us, I like to keep a percent of our overall portfolio diversified into cash and bonds to smooth out the volatility, even if that hampers long term returns.
The Power of Investing Now
During the previous 20 years since I left this job, there have been times when the value of this account went down and other periods when it went up. As John Bogle recommends, I didn’t pay much attention to the value, because I had no intention of withdrawing the funds.
Had we not made the decision to struggle financially during those years, there is no way we would have the available assets we have today.
To be perfectly honest, moving from Ohio to Southern California was a bit of a culture shock. As a “down to earth” girl, not overly obsessed with fancy cars etc., the So. Cal. environment was a shock. Everywhere you turned there was another luxury car. Appearances were very important!
This didn’t make me feel bad, while I drove my Chevy Cavalier, but it surprised me.
I knew I wanted to become wealthy eventually , and I understood that saving and investing was the way to get there. Well, saving, investing, and of course building up our earnings.
I enjoyed our lifestyle and realized how lucky we were to live in beautiful Southern California. I’d be lying if I said there weren’t times when I wished we had more disposable income:). But overall, I appreciate our former financial choices as I see the great payoff today.
That said, I don’t think we could have met our financial goals as easily had we not decided to move to a more affordable place to live while raising our daughter.
The Real Secret to Wealth
This simple chart shows the power of leaving your money in the markets and letting it compound. This is the value of 1 penny doubling every day for a month. On day 31, the doubling of the prior day’s funds equals over $10 million.
Although you won’t find a 100 percent return anywhere legitimate, notice how it took quite awhile for the true benefit of the compounded growth to be realized.
We continued to contribute the maximum to our workplace retirement accounts, IRA’s, Roth IRA’s, and 529 College Savings account. Nothing deterred us from our aggressive saving and investing. As our income grew, our lifestyle improved, but never went “over the top”. Not until recently have we experienced the explosion of growth from our compounded investing.
All of our older accounts show the same type of growth as that initial TIAA-CREF workplace retirement account. Although, I wouldn’t have believed it at the time, the longer you leave your money in the markets to compound, the greater the growth.
Time in the markets, even more than investment returns, is the greatest predictor of wealth from investing. In fact, Albert Einstein once commented that compound interest is one of the greatest wonders of the world.
Investing Rules for Wealth Building
Time in the markets is the most precious commodity when it comes to investing. By leaving money in the markets to grow, the initial account contributions can multiply. Keep the money invested for a shorter period and there’s less time for the sum to compound.
Decide whether you are willing to make a tradeoff. You can’t have everything now and later. Ask yourself if you’re willing to sacrifice a bit now for the likelihood of having more later.
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