How I Currently Explain Investing To Others

Trying to explain the idea of Financial Independence to others has been an interesting endeavor. As I learn more in the world of personal finance and make small adjustments, I am finding my stress level as it relates to money is slowly decreasing. I realize that the more I educate myself and hear from others, the more it becomes apparent that other lives could also benefit from a little more knowledge. Now, I am by no means an expert or an advisor, or a teacher, but I do enjoy helping others, and I love the idea of paying it forward so to say.

Everybody has different backgrounds, worries, and preconceived expectations when it comes to their financial journeys. However, most people are brought up with the idea that personal finance is a taboo subject to discuss, so it can seem mysterious and frustrating for the average person. This makes it hard to talk candidly with others about some of the concepts of Financial Independence. Rather than ask someone about how they go about and think about savings and retirement, I tend to share little bits at a time about my own history and perspectives. Sometimes they will share some of their ideas and insight, and every now and then they will share about their own journey.

Investing and Compounding

Although I’ve only talked with a small number of people about finances outside the Financial Independence community, one of the most powerful concepts that I like to share and have been mildly successful with has to do with investing and compounding. This is due to the transformation that the concept has had on my way of thinking. If someone seems mildly interested in learning about how investing in the market could be beneficial, I might steer the conversation towards compounding, and more specifically doubling.

I would explain that for the longest time I thought that saving for the future meant putting money into my savings account with my bank. I figured that putting it anywhere else was too risky. When I learned that total market stock funds tend to double every 7-10 years over long periods of time, I started to finally grasp the concept of compounding by plugging in actual numbers. This is when I would explain or write down a scenario I started to use for my own understanding.

If I’m talking to a 24 year old, I might say something like: If a 24 year old sets aside $500 a month for a year, and then invests that $6,000 into a fund that doubles every 10 years, it will be worth:

• $6,000 at age 25
• $12,000 at age 35
• $24,000 at age 45
• $48,000 at age 55
• $96,000 at age 65

If they put it into a fund that doubles every 7 years, it will be worth: 

• $6,000 at age 25
• $12,000 at age 32
• $24,000 at age 39
• $48,000 at age 46
• $96,000 at age 53
• $192,000 at age 60
• $384,000 at age 67

If they show interest and want to see more, I would explain that the stock market can be volatile from year to year, but this is the type of returns that can happen over long periods of time, and the doubling concept is using these rates with the Rule of 72.

Spreadsheet

If they’re interested, I offer to make them a basic spreadsheet with a graph to show what it looks like for money to double over time. If they want, we can add several variables that can be changed by them. This gives them the ability to play with actual numbers they might want to consider investing, on their own time.

There are several sites with a compound interest calculator and graph, and share how to set one up in a spreadsheet. There are a number of videos that show you how to put these together too. I enjoy and learn a lot about putting spreadsheets together on my own, and then compare with the nuances that professional templates take into account. Whether using a template or putting together a spreadsheet, depending on the purpose, you could make it as simple or complicated as you want. I will typically include current savings information and factor in percent return per year. We had only discussed investments from one year so far, but here we can show how changing the amount invested in each future year will dynamically change the overall investment returns. It is also worth considering factors such as inflation, social security, and any pension.

Understanding the power of investing is only a small part of planning out one’s journey to Financial Independence, but this is my current go-to for introducing others to the subject. The ability for investments to double multiple times in such a short period can I think encourage the type of mindset that can set people on a super-path. I’m constantly considering other ways of sharing ideas that best connect with others, so I’m sure my spiel will change over time.

Links/Resources

• Historical rates of the S&P 500
• Rule of 72
• Compound Interest Calculator
• Calculate Compound Interest with Excel
• Videos to Create Spreadsheet with Compound Interest

Reader Questions

• What concepts help motivate you to invest in your financial future?
• Have you put together a spreadsheet to predict investment returns?

Leave your answers or comments below – or email us directly at info@epicfinancialjourney.com