Updated: Oct 6, 2021
"Money doesn’t grow on trees" -- most of us have heard this probably from a frustrated parent when we were asking for the newest toy or the latest fashions. I always used to laugh and I thought, yes, it would be great to have a money tree. But, the truth is that money actually grows faster than trees! One of my favorite childhood memories was having a passbook savings account (when interest was 8 or even 12 percent) watching as every time I went in to deposit more money that I would have earned at first a quarter and then later a dollar in interest on my deposits. As a kid I liked that feeling that money would just materialize out of nothing and appear into my savings account. This, along with saving money in my metal R2D2 bank were some of my first experiences around saving and finances and generally, I feel lucky that my first experiences around money were so positive.
As a kid, I learned that interest was a really cool thing. Then during my college days, I got my first mutual fund account – an Edward Jones Account courtesy of my brother and later still a first stock account courtesy of E-Trade). I learned that there was something even better than interest – capital gains. To me, it was a magical thing. From an early age, when I think about money, I think about a fundamental property of money: that it grows. And yes, money doesn’t grow on trees, but the amazing truth is that money actually grows like a tree. But, the point of saving money is that sometime in the future you will make a withdrawal and spend it. (you might do the same with the trees in your forest, cutting some of them to make lumber.) I remember years later drawing down my bank account to pay for college. (that wasn’t much fun) and then later still, I withdrew money from an IRA to make a downpayment on a house. (this was more fun because I was getting a house) but still not as much fun as getting my statement and watching it grow. Yes, there was a time in 2001 and in 2009 when I received a statement and it was dramatically less. But, those were just “paper losses” or so my friend who worked at the Chicago Board of Trade told me. And he was right, a few years later they were back where they started and then higher still.
But what I think I like having the most, is that I like having enough. Every month when I get my paycheck, I pay all my bills and then there is money left to save and invest. When I first started working it was only a couple hundred a month. Then one day I was lucky enough that I could save a couple thousand a month. The months that I hate (usually for me it is the summer months when I don’t earn a paycheck) is when my savings goes down to pay for my expenses. I guess my point is that saving is a powerful thing. I won’t get into the details of how much you should save (definitely over 20% of your income – not 10% as you may have been told at some point … I hope to cover savings rates more in another post) but also know why you are saving. For me, it feels good to have enough. And I hope I will always have enough. When I draw my pension in retirement, I hope that I will save 20% of my pension payment too. A great book to read is Enough by John Bogle (the guy who invented the low-cost mutual fund). What a great name for a book. This reminds me of one of my favorite sayings. Kurt Vonnegut was on his way to a party of a very very wealthy person. Joe Heller (another famous author), asked Kurt what it was like to know that this guy made more in a day than Kurt made in all his royalties from Catch-22. Kurt, (being the clever guy that he is) responded by saying, “I have something that this guy does not have, enough.” I hope that I can continue to cultivate a mindset of contentment and that I can keep my materialist desires in check!
Going back to interest, One thing I also love about interest is how it compounds. So, even if I meet someone fabulously wealthy, I know that I too, given the right amount of time, will be wealthy as long as I simply save more than I make every month. Interest compounds and in fact, it grows exponentially. I guess now that I think about it, money grows faster than trees because trees don't grow exponentially and there is a limit to how tall trees will get. (As Jeff Bezos has shown us, there is no limit to personal wealth!) It should be possible given some smart investing decisions, to double your investments every seven years. (this assumes about a 10% rate of return – google rule of 72 for more info on this!) So, if you start with $100,000, in 7.2 years (not saving any additional money and assuming a 10% rate of return) it will be $200,000 and in 14.4 years it will be worth $400,000. In 21.6 years - $800,000 and in 28.8 years - $1.6 million. And this is not even accounting for the fact that you can save additional money each month too! So, the single greatest tool of the wealthy is patience and not even thiftyness, but just the ability to save. So, we can make money such a complex thing and yes, deciding how to invest and looking for smart ways to maximize returns and minimize tax liabilities are good things to know. But, let’s just start with the basics and that is save each month and be patient knowing that in fact yes, money doesn’t grow on trees, but with some average investing skills, it can grow faster than trees.