How You Can Build Wealth Saving Small Amounts for a Long Time
Photo by Aaron Burden on Unsplash
“People spend years trying to get rich quick”
– Sahil Lavingia
In many places on the internet we will find people touting secret ways to “get rich quick”, and in many instances, they will gladly teach us how to do it for a small price. The surest way to wealth is long-term saving and investing. Even small amounts of money saved for a long period can allow you to generate hundreds of thousands in savings. In this article, we will look at the following:
- The slow and fast horse
- Short term investing mistakes I have made
- How you can be a millionaire by saving and investing just $250 a month
- Day trading vs. long term investing
- Conclusions
I believe that the time spent cultivating the discipline to save and invest with a long-term mindset is better spent than the time spent laboring on “get rich quick” ideas. Cultivating a “long-term mindset” doesn’t apply just to your stock investments, but it can also apply to a business idea you have, your career, or any other pursuit that requires lengthy dedication, commitment, and patience.
The slow and fast horse
If you think to yourself, “I don’t want to put my money in long-term investments and wait 30 years, I’d rather invest it in myself so I can be wealthier faster”. Think of investing in yourself as the fast horse in the race – it will get to your destination faster, but there are chances that it may not pan out as you’d hope. The horse is fast, but it’s risky. Think of investing in the stock market for 30 years as the slow horse, it will most likely get to your goal destination, but it will take a long time. Why not bet on both horses?
Imagine you are fortunate enough to have $800 in spare income each month. Now let’s say you want to start a bagel store. Great idea! Of that $800 you save each month, you can invest 80% ($640) into your bagel store idea: saving for a down payment on a storefront, advertisements, ingredients, and baking equipment. The other $160 you can stuff into an index fund, such as the S&P500 or the NASDAQ. You are effectively betting on both the fast horse and the slow horse and thereby increasing your odds of winning.
Short term investing mistakes I have made
When I first started investing, I had a short-term mentality. I invested in companies as a momentum trader would, rather than a long-term investor. For example,
- I invested in Enphase (ENPH) in June of 2019 at around $18 a share because I thought they were making great revenue gains with an essential technology needed for solar panels. I quickly sold 3 months later at $27 after they dipped from a high of $30 and never re-invested. Today they are trading over $130 a share. Their technology is critical in solar power infrastructure.
- I invested in Carvana (CVNA) in July of 2019 because I liked their business model: everyone hates going to car dealerships, so why not buy your car online without the hassle? However, I sold very early to take a quick 20% gain. Today, CVNA has more than doubled in price
The same can be said for several other companies I have invested in in the short amount of time I have been investing. I have learned that, as young investors, if we see the potential in a company it’s better to stay invested for the long term than try for short-term profits. You may get lucky every now-end then with swing and momentum trading, but I personally don’t think it’s sustainable for a long period of time.
How you can be a millionaire by saving and investing just $250 a month
Starting to invest in my 20’s gives me almost half a century if I’m lucky to live to 70, to capture compounding returns. Let’s look at someone who saves just $250 a month starting at 21 years old; how much will they have at 70 if they can just get an average of 7% return a year.
During the first year of investing, we would have accumulated about $3200. By the time we hit 30 years of age, we would have saved about $40,000. By the age of 50, we would have accumulated over $280,000. By 68, we would have crossed the $1,000,000 threshold. We may have other side hustles, ambitions, projects, startup ideas, and business ventures that may bring us wealth and financial freedom much quicker, but saving and investing a little at a time should be thought of as our “slow and steady wins the race” plan. It doesn’t hurt to have multiple horses in the race to financial independence.
| Age | Amount Saved |
| 21 | $3,210 |
| 22 | $6,435 |
| 23 | $9,885 |
| 24 | $13,577 |
| 25 | $17,527 |
| 26 | $21,754 |
| 27 | $26,277 |
| 28 | $31,117 |
| 29 | $36,295 |
| 30 | $41,835 |
| 31 | $47,764 |
| 32 | $54,107 |
| 33 | $60,895 |
| 34 | $68,158 |
| 35 | $75,929 |
| 36 | $84,244 |
| 37 | $93,141 |
| 38 | $102,660 |
| 39 | $112,847 |
| 40 | $123,746 |
| 41 | $135,408 |
| 42 | $147,887 |
| 43 | $161,239 |
| 44 | $175,526 |
| 45 | $190,812 |
| 46 | $207,169 |
| 47 | $224,671 |
| 48 | $243,398 |
| 49 | $263,436 |
| 50 | $284,876 |
| 51 | $307,818 |
| 52 | $332,365 |
| 53 | $358,630 |
| 54 | $386,735 |
| 55 | $416,806 |
| 56 | $448,982 |
| 57 | $483,411 |
| 58 | $520,250 |
| 59 | $559,668 |
| 60 | $601,844 |
| 61 | $646,973 |
| 62 | $695,261 |
| 63 | $746,930 |
| 64 | $802,215 |
| 65 | $861,370 |
| 66 | $924,666 |
| 67 | $992,392 |
| 68 | $1,064,860 |
| 69 | $1,142,400 |
| 70 | $1,225,368 |
Day trading vs. long term investing
Long story short, most day traders end up making less than the minimum wage after factoring in taxes. In a paper studying individual day traders in Brazil between the years of 2013 and 2015, “97% of all investors who persisted for more than 300 days lost money. Only 1.1% earned more than the Brazilian minimum wage and only 0.5% earned more than the initial salary of a bank teller all with great risk.” [1]. Although you can argue that American day traders are much better, I’m willing to bet that the statistics for American day traders aren’t significantly better than those for Brazilian day traders.
Conclusions
The main takeaway is that to build wealth, we should consistently put away small amounts each month and invest it in mutual funds or companies we believe to have long-term potential, and then hold onto those shares for a long time. One indicator I look for in companies is consistent revenue growth.
[1] Chague, Fernando and De-Losso, Rodrigo and Giovannetti, Bruno, Day Trading for a Living? (June 11, 2020). Available at SSRN: https://ssrn.com/abstract=3423101 or http://dx.doi.org/10.2139/ssrn.3423101