I’ve always been fairly good with money, but I never realized the power of investing and compound interest until I was well into adulthood.
My Prototype
I was more of a “hide it under your mattress” hoarder of money –which I now know is a surefire way to deplete money’s buying power through inflation — but as a young kid I had no idea. At age 7, I tried my luck at money lending to my step-siblings. That didn’t go too well, since I didn’t have debt collectors at my disposal and they had a hard time taking their youngest sibling seriously. Growing up my parents paid us for chores done around the house. When we received the money (usually $1 per chore) we were shocked to discover that we only received $0.33 for every dollar. “Taxes and Social Security” my Mom said.
Saving
In high school, every weekend I’d stay over at a friend’s house I was given $20. I never spent it. Instead I kept the money and quickly accumulated several hundred dollars. Which I still have. In college, my Mom gave me a small stipend to live on because she wanted me to focus on my studies instead of getting a part time job. I saved almost all of it. Every year she’d ask if I needed more money and I’d tell her how much I had left (about 90%) and she’d accuse me of not living and being a miser (surprising, coming from her), but I was content and didn’t feel the need to spend more money.
Then real life began. I graduated college and accidentally learned about the power of investing while living in one of the most expensive cities in the world: New York City. I started my first job and took the much less than ideal advice from my parent’s financial planner about which fund I should choose for my 401K. I set my contribution limit and ignored it.
The Big Awakening
A few years later I was considering rolling over my 401K to my new company and discovered something shocking: despite my relatively low contribution amount, no company match, and a less than ideal fund, I now had almost $30,000 in my 401K. That was more than I had in the bank. More than I could have dreamed my net worth would be. I was dumbfounded. I didn’t understand how this could have happened. I just set aside money and forgot about it. Suddenly, the world of compound interest opened to me and I voraciously started reading everything I could find about investing.
What I Learned About Investing
I soon discovered that investing in low-cost index funds was even more powerful than I had imagined. Previously, I had taken my paycheck and bought things with it. If I instead bought some things and some stocks that money would start paying me! After some time, my investments could earn more money than I could in the working world. I would literally make money in my sleep. That was a very seductive prospect.
So, I started working towards the goal of creating passive income. I made a plan, made a budget and cut any spending that wasn’t bringing me joy. I changed my phone plan, learned how to travel hack free flights and drank less at bars, while having more house parties. Every dollar saved went into my investments.
The next year I ramped it up a notch. My partner and I decided we were sick of paying almost $3,000 a month for a 400-square foot studio, with 200-square feet of useable space. So, we decided to move across the country to Seattle without a job, apartment, friends or family. I was only able to do this because of my savings and knowing I had enough to tackle anything that came up.