- Four years ago, I started saving for retirement, but I was too afraid to invest the money.
- But reading the book “Professor Millionaire” opened my eyes: I quickly learned that I was losing years of compound interest.
- I immediately made a change and invested the money that was kept in my Roth IRA, and now I am well on my way to a comfortable retirement.
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Four years ago, I was chattering endlessly about whether it was too risky to invest the funds I contributed to my Roth IRA retirement account instead of leaving them idle. But then, two short sentences in the book “Professor Millionaire: The Nine Rules of Wealth You Should Have Learned at School” finally convinced me that the answer was yes.
The text, written by Andrew Hallam, contains tons of facts, figures and explanations that illuminated everything from index funds to compound interest for me. But it was two simple lines in Chapter 2 that lit my ass at the time and continue to inform my investment strategy even now.
“For the past 90 years,” wrote Hallam, “the United States stock market has generated returns in excess of 9% per year. This includes the crashes of 1929, 1973-1974, 1987 and 2008-2009.”
It may not seem like much, but that information reverberated through my brain like a bomb going off. I was so focused on the market’s sharp rises and falls that I failed to notice its steady upward trend and what it had to offer young investors like me.
It was time to zoom out.
‘Professor Millionaire’ challenged my preconceived notions about the market
Before reading “Professor Millionaire”, my understanding of the stock market was vague and amorphous. I saw it as a map that only a rarefied group of people could read, and I was not one of those people. Without a map, I was sure to choose a “bad” action; one that would lead first to a loss of money and then to a loss of dignity, in quick succession.
I didn’t want to look stupid for choosing the wrong stocks, so instead, I didn’t choose any stocks, comforted by the knowledge that I couldn’t lose money that I hadn’t invested.
But as soon as I read Chapter 2, understanding hit me like a ton of bricks: not only did I could lose money but actively was lose it. I was leaving it on the table. For every day that my money was out of the market, I lost a rate of return that I couldn’t find anywhere else – and that had to change.
The missing piece of the puzzle: compound interest
What Hallam explained was that, due to the magic of compound interest, the secret was not to time the market or put a huge amount of money into savings every month. Instead, it was starting early. Just like rolling a snowball down a hill, the higher you go up the slope, the longer the ball has to accumulate.
To illustrate his teachings, Hallam included a theoretical question. He asked readers if they would rather invest $ 32,400 and make it $ 1,050,180, or invest $ 240,000 and make it $ 813,128.
The former is clearly the preferred option, but seeing it explained in this way gave me my own particular sense of relief. As a freelance writer with a very low income, I couldn’t imagine being able to save $ 240,000, but an investment of $ 32,400 seemed much more affordable.
In fact, with my habit of popping my Roth IRA every year, I was scheduled to reach that limit in 2021, with decades of years of pay still to come. From then on, how the money grew depended on me.
I left my mistakes in the past and invested my money
Like anyone without a time machine, the earliest I was able to start investing was that very day. It left me a little behind Hallam, who started building his nest egg at 19, but I was determined to stop sabotaging myself with that kind of thinking. The time to invest was now, no matter what mistakes I made yesterday.
I changed the funds in my Roth at Vanguard from the deposit account to a brokerage account and bought shares in three funds: an international stock index fund (VTIAX), a US based stock index fund (VTSAX) and a bond index fund (VBTLX).
So I turned to my savings goals
Anxious to try to make up for the time I had wasted, I looked for even more opportunities to save.
I already had a savings plan to ensure that I could maximize my contribution, no matter how low my income fell, and at the time, there was not much more room for maneuver in my budget.
But as my income increased over the years, I also increased the automatic monthly transfers to my savings account, following Hallam’s advice to pay myself first, instead of just saving what is left over at the end of the month.
Four years after reading your book for the first time, I recently doubled my monthly savings from $ 630 to $ 1,260. And as high-yield savings rates drop, I have invested as much as I can, hoping for my little snowball that descends relentlessly down the hill towards my retirement.