Money Musings: 💭 The (surprising) riskiest part of investing 😮
One of the reasons so many of us are scared to start investing is that we believe we could lose all our money (or even some of our money).
And by we I mean me, too. I was very wary of getting started. We work hard for our money, why risk it?
But the cost of not risking it is far too great (hello 👋 again compound interest) and the risk is not actually as risky as we think.
Over the past 30 years, the S&P 500 (which is often used as a proxy for the stock market), has earned an annual return of 8.29% (adjusting for inflation).
And that includes the market drops during the Great Recession and pandemic. I’ll take that return!
The dips are why it’s so important that we invest for the long term. When we don’t need the money right away, we can wait out drops in the market before selling. And get that 8%+ return.
For fun (you know I have a unique sense of fun!), what does this look like in numbers?
Let’s say you invest $1,000 and it grows by 8% each year. After the first year you have $1,083, by year 15 you have $3,302, and at year 50 you have $53,631 (over 53x what you started with).
In this scenario you ONLY invested $1,000 that first year. Imagine if you invested each year going forward!
Long story short: The market can (and most likely will) move up and down, but over the long-term, it’s gone up over 8% per year.
Important fact: You don’t actually make or lose money until you SELL your investment. So when the market is down (like it is now), you haven’t lost money (unless you need to sell it then).
The truth is, the riskiest part of investing is that we’re human. Fear is real and when we’re fearful we make emotional decisions like selling when our investments are down.
Believe me, it might sound easy to avoid, but in the moment, when you’re seeing the frenzy on the news, there can be an urgency to try to cut your losses.
This is where a financial planner, money coach, or accountability buddy can help keep us from making a mistake and losing money. Because, remember, we haven’t lost money until we sell.
Risk has a bad rep, but really it’s our behavior that gets us in trouble.
P.S. Happy birthday Dad! 🥳 I love you! ❤️
P.P.S. We're now on Tik Tok! Follow along here.
MONEY MOVE OF THE WEEK
BUDGET FOR MEDICAL EXPENSES.
This one is a biggie and it’s important. While we can’t know what will happen in any given year as far as our health and medical expenses, we can put together a plan that will prepare us for the expected and protect us from the unexpected.
Here’s how:
Estimate your expenses given what you expect to happen this year. Use the information from past and current bills to estimate what you expect to pay. Better yet, call up your providers to get an exact or estimated cost. If you hit your deductible each year, make sure to account for that.
Do you have any procedures or surgeries coming up? Call up the providers and ask for an estimated cost.
If you pay insurance premiums, make sure to include those. If they are taken out of your paycheck before you receive it, you can skip this part.
Look at the worst case scenario. Dark, I know. What is the most you’d pay out of pocket? This is probably your out-of-network out-of-pocket max (or if you only use medical professionals in-network, it's your in-network out-of-pocket max). You can account for this number in your rainy day fund or in your HSA account.
Understand the potential benefits of an HSA (Health Savings Account) and potentially an FSA (Flexible Spending Account) if offered through work. You can read more in Chapter 10 (all about insurance) in Financial Adulting.
YOU GOTTA SEE THIS
PROTECT YOUR FINANCES IN A RELATIONSHIP.
When I interviewed Lauren Hunt, divorce attorney extraordinaire for my book, she shared something that didn’t surprise me. If a divorce is inequitable, it's usually the woman who gets the short end of the stick.
That’s why protecting yourself financially isn’t just the smart thing to do, it’s a form of activism. By protecting ourselves we can inspire others and make it easier for them to do the same.
Lauren firmly advocates for a prenup (a prenuptial agreement) if you’re getting married, a postnup (postnuptial agreement) if you’re already married, or a cohabitation agreement if you’re living together and not married.
These agreements describe your wishes for your assets (and living situation) in the case you get a divorce or break up. And if you don’t have an agreement in place, be very conscious of what the laws in your state say.
To learn more, check out her Instagram and website which both are full of great tips and resources.