3 min read
Starting out, a high income is the one ingredient that will get you moving the fastest.
There are two components that determine how much you’re able to save: your income and your expenses. The larger the gap between these two, the more you can save, and the faster your net worth will grow.
Keeping expenses low is important, but you still won’t get anywhere fast with a low income. Consider an individual who is able to live frugally on $25k per year. With a yearly income of $30k, they can only save and invest $5k per year. Assuming a 5% annual return on investments, they’ll only have $29k after five years:
Increasing yearly income to $40k, $50k, or $60k in those early years makes a huge difference:
Investment returns won’t move the needle much in the early years.
In each of the above savings scenarios, investment returns would account for only 14% of the total ending net worth after five years:
A whopping 86% of your net worth (assuming 5% ann. investment returns) will be composed purely of savings. This is why your savings rate is so important in the early years. It’s the number one factor that determines how fast you can grow your net worth.
Lucky individual stock picks won’t impact your net worth much if you don’t have enough capital to work with.
In college, I used to dabble in individual stock picking. What I didn’t realize at the time was that I simply didn’t have enough money to invest to reap the benefits of lucky stock picks. At the time, I would typically invest $500 in a single stock and ride out the investment for a few months, hoping to sell for a quick gain.
Suppose I invested $500 in Facebook 5 years ago. Since July 2013, the price per share has risen from $25 to over $200 for a 8x gain:
Even if I had made a lucky pick with Facebook, an 8x gain on $500 would only be $4,000. More than likely I would have sold once the share price doubled, which would have turned my initial $500 investment into less than $1,000 after trading fees and capital gains taxes.
Even if you get lucky and invest in the right individual stocks in your early years, you probably won’t have enough capital at work to actually see meaningful gains.
Side hustles can help increase your income when you’re at the bottom of the salary totem pole at work.
My sister works as a vet technician and makes about $16 per hour. She loves working with animals so she decided to sign up for Rover, a site where people in your area will pay you to watch their dogs.
Over the past year she has landed six or seven repeat-customers who pay her on a weekly basis to stop by and let their dogs out, take them on walks, or feed them. She typically earns around $200 per week doing this.
Her day job pays her ($16 * 40 hours) $640 per week, so she has effectively boosted her income by over 30% from a side hustle she loves doing.
Thanks to the internet, it has never been easier to connect with people looking for specific side hustle services. This can have a real impact on your earnings, especially if you’re just getting started in the workforce.
I personally tutor people in stats for $40/hour, which is a niche topic that I have domain knowledge in. It’s a lucrative side hustle that boosts my own income.
Once you join the six-figure net worth club, stock price appreciation and dividends start to make a real difference.
With $100,000 invested, a 10% up year for the stock market would increase your net worth by $10,000. That’s a noticeable amount.
Stock dividends also become noticeable.
During my first six months of 2017, I earned a total of $38 in dividends.
During my first six months of 2018, I earned a total of $861 in dividends.
That’s an entire month of rent that I could pay for using only dividends.
Patience is key in the early years.
Building your net worth is like getting a flywheel to start spinning. It’s annoyingly slow at first. It requires serious work on your part to get the flywheel moving. But once it starts, it only moves faster and faster as time goes on.
This is why it’s so important to cultivate patience when you’re just starting out. You likely don’t have a high income or investment returns to help you out. So, you have to quietly sit and work. Steadily save. Consistently invest. Live simply. Increase your income.
Your tiny daily habits will lead to visible net worth growth a few years down the road. Until then, practice patience.
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