Let’s discuss the third step to wealth, the “I” in “ESI Money.” As noted in the explanation of the site’s meaning , the “I” stands for “Invest.” (Just to keep everyone up to speed, earn and save are the other two.)
Investing is the step that super-charges your net worth and opens the door to high levels of wealth.
It does this by taking the cash flow generated by the first two steps and growing it to astounding levels over time.
You’ve probably heard the phrase “money making money”, right? This is the point where that happens — the money you save and invest starts to earn money itself.
Keys to Investment Success
There are many investing decisions to make to be sure your money works the way you want it to. But regardless of which path you choose, there are three factors that drive overall investment success. They are:
- Amount invested — How much money you save and put into investments. The more you invest, the faster your net worth is likely to grow. Personally, I try to save a good chunk each year so as much of my money is working as possible.
- Time invested — How long your money is invested. The longer your money has to work, the more it can grow. This can become a very significant part of your net worth growth, especially after 20 or 30 years of investing. Time is the best way to maximize your investment return because your money starts to make money. And then that money making money. And then that money making money. And on and on. The cycle repeats itself year after year, decade after decade, until your investments have grown many times over. This is one of my “secrets” to success — invest early, invest often, and what your money grow.
- Rate of return — The annual growth rate of your investments. Higher is better (of course) but also comes with more risk (the risk that you could lose money) so it’s a balance. I prefer a good (not great) return with lower levels of risk.
Stages of Investing
There are many investment choices including stocks, bonds, mutual funds, real estate, commodities, and much more. We’ll discuss most of these at some point, but for now all you need to know is that your life stage will probably determine what investments you select.
Early in your life it’s likely you will focus on growth. This is simply investing so your money grows in value, like buying a stock and seeing the price increase. Stocks are well-suited for this stage and are the choice used by most people to grow the value of their investments.
As you age and transition into retirement (or at least slow down), you’ll move to a more conservative investment strategy to preserve your money. At this time you’ll want a reasonable combination of growth, income, and withdrawal to make sure your money lasts longer than you do.
How I’ve Invested
The summary above mirrors how I’ve invested so far. Here are a few more details to be specific:
- Index funds — I have invested in index funds for decades to grow my investments. I currently use three primary index funds: Vanguard Total Stock Market Index Admiral (VTSAX), Vanguard Total Bond Market Index Admiral (VBTLX), and Vanguard Total International Stock Index Admiral (VTIAX). I’ll talk about why I prefer index funds and use Vanguard in a later post. But these have served me well through the years and helped grow my net worth to levels far beyond where my income alone could have taken it.
- Real estate — As I’ve started to look at retirement strategies, I’m investing in more income-producing assets. A few years ago I started investing in real estate. It’s been a very successful effort and my rental units now make up the majority of our retirement income.
- Other income investments — I’ve tested other income-producing investments including peer-to-peer investing (which hasn’t worked out well) as well as dividend investing. Nothing really to write home about so far though.
Needless to say, investing is a vital part of growing your net worth. Done incorrectly and it won’t help you much at all. Done well and your net worth will shoot to the moon.
If you’d like to read more about investing, see my invest category of articles.
How They All Relate
To wrap up the last three posts where I’ve shared the details behind the “ESI” name, let’s look at how they all work together:
- E – Earn as much as possible. Your career is the best way to do this, but there are other options as well.
- S – Save as much as possible. Save when you spend, control your spending, and set aside all you can.
- I – Invest to grow your wealth. Take your savings and put it into investments that will grow and grow and grow.
There you have them: three simple steps to wealth.
Nice to review the foundation principle definitions. I have found a vast waste land of blogs that don’t fit me and where I am at in my journey. None really looked at their definitions of earning, saving or investing.
Appreciate the thoughts. Looking forward to digging deeper in these topics with you.
Thanks for reading!
I wasn’t going to ask it here since I haven’t saw any posts about it here but my advertisements did show it so here goes nothing. Are you going to write an article on Bitcoin? I personally don’t own any Bitcoin, and I’m just getting started in building my net worth, but I am interested to hear the perspective from someone who has lots of investing under their belt.
No, I’m not going to write an article on Bitcoin.
And I wouldn’t touch it with a 10-foot pole. Too speculative for me…
Thanks for your opinion. Sounds like my initial instincts to get some precious metals at their current prices were right. I’m looking forward to reading more articles and more millionaire interviews!
I enjoy listening to your podcasts and reading your info here.
You listed your three Vanguard Index funds.
What percentage in each?
Also, how do you envision changing each percentage when the correction hits?
How would that change compare to what you did to your portfolio in 2008 to minimize losses?
Thank you.
I am NOT a typical investor, so it’s highly unlikely that anyone reading this will want to do what I’m doing. Mainly:
*I’m 100% in US and international stocks — about 80/20. I used to have bonds, but I dislike them and eliminated them.
*I do not need my investment money — ever. If you read the other posts in this blog, you’ll see that I have an income set up from my rental properties and businesses that more than covers my expenses. So no need to dip into my investments.
*As such, my investment horizon is very loooooong. Basically the rest of my life. So in the long-term, I believe things will work out, though there will likely be a drop coming.
*So I’m not doing anything. I’m letting it ride. We’ll know in 30 years if that was the right decision or not.
One other note: Since I am churning off more cash than I need, I’m building it up nicely. If things get really bad, I’ll probably put it all into either the market or more rental properties.
I enjoy reading the blog. I get from the above comment that you dont envisage a scenario where you will need to start using the money from your investments to live off and therefore have a long investment horizon.
Given this what do you intend to do with the capital once you and your wife has passed on. Are you planning to leave a significant portion of it for philanthropic purposes or something else? The interest is not any comment about what you might choose to do with the capital, more around what the long term goal is that drives you to maintain your interest in doing this.
We are working that out now as we update our estate plan.
The current plan would have us splitting the money between our kids and charity, but that is still TBD.
I’ll likely write about it once we get it resolved.
Sounds like we are both on the same path. I am semi retired and my rental property provides a nice income, with some to stash away for the future.
I understand your stock choices. I was there for many years. Today I’m feeling a desire to put something into bonds, despite their low returns. Maybe I’ve been reading JLCollinsnh too much? The more I read, the more I see people recommending at least 20% bonds. Much as it pains me to see my returns decrease, I’m doing it. I’m writing this to remind myself I think it’s important, for a safety net, for me, not anyone else. Guess I’m looking for more income streams, more security. Is that overkill? Probably.
ESI – I live in Portland, Oregon. A couple of weeks ago we had a riot where extremists on the right and left started fighting each other – similar to the violence in Charlottesville. People are openly discussing civil war in the media. Survey data indicate that fully a third of the country feels political violence may be a possibility in the new future.
How are you factoring political risk into your thinking?
There are a wide range of “what if” issues that “could” happen but are highly unlikely to happen. Widespread political unrest like you saw would fall into that category IMO.
So for now, I simply remain watchful but I don’t think any action is needed at this point.
I love everything about this blog. I would add one important variable to the above list and that is “invest as inexpensively as possible”.
In a world where most people believe that you get what you pay for, investors should be cheapskates because you keep what you don’t pay for — and that small day-to-day savings can add up to be a huge number over time.
I have moved from a fee based advisor who was taking a percentage of my assets to a “fixed fee” advisor. The ROI on this choice is enormous!
Keep up the great work!
Jeff
Jeff,
I’m curious – how would you describe the value in using an advisor at all? Like many here, I’m doing low expense index funds in a balance that reflects my risk tolerance and time horizon. But I worry that I’m missing something and thinking about using a fixed-fee advisor. Can you tell me why you’ve chosen that option and what you feel you’ve gotten out of it in comparison to managing it on your own?
Thanks
Hello ESI,
Wondering if you have any experience with Fortune Builders – Than Millers suite of companies – They are pretty aggressive on the real estate training front, but also into Hard money and Peer-Peer lending for real estate.
Thanks and keep up the amazing work, you are an inspiration to us all!
Sorry, I haven’t.
Hi ESI,
Curious on your thoughts of the current market. I’m in a unique position where I shorted a few bug tech stocks a few weeks back and now have a good chunk of profits to do something with.
I want to make a smart long term investment – ideally battered down blue chips, that I can hold for 20 years.
I feel this is a once in a lifetime buying opportunity but not sure if it’s over. Any advice? I know timing the market is never a great idea, but I think we have a rare buying opportunity.
Watch for my post tomorrow. I tell what I’m doing (and thinking of) and I’m sure others will share their thoughts. Then you’ll have plenty of food for thought. 😉
I remember I started reading an article you wrote about maximizing returns while minimizing risk when investing in a blend of domestic and foreign index funds. You had a graph and explained the sweet spot. Can you please direct me to that post, I can’t find it. TIA
I think you are confusing me with someone else.
I learned so much. Your articles are written so well and in such a easy to read format.
I am over 65 years old and do to circumstances, Covid-19 ect. my small business is at least for now closed and I have no assets except cash and passive income of approx. $70,000.00 annually.
I live in Los Angeles and finding local rental property is at least for now very expensive however
I am looking in other markets.
I would like to invest in Vanguard Index portfolio. Do you have any articles or suggestions as to going forward for Seniors in my situation.
Thank you and stay safe.
That’s a pretty specific situation, so I don’t have anything that’s exactly for you.
But if you have $70k in income, you can live well in many parts of the country.
Dear ESI,
What do you think about the last couple days? Is this a necessary correction after all the frothiness with Apple, TSLA split, Zoom earnings, etc — or is this more of a rug pull situation where we potentially retest March/April lows?
I know the FED is doing its thing, but curious on your take. Thanks in advance!
I think the market goes up in the long term (which is 10 years or more).
If your time horizon is shorter than that, you need to consider whether or not you should be in the market.
Also, even if you have a long term time frame, if you can’t handle the ups and downs that naturally occur, then you need to adjust your asset allocation to one that’s less volatile and a better fit with your personality (note, it will likely have lower returns, but that’s what you give up for more stability).
NO ONE knows what the market will do day to day. In fact, even saying that it goes up over time is a best guess based on history. But the studies show that if you want to make the most of it, you save and invest as much as you can for as long as you can. And ignore the noise in between. 😉
Besides, we’re all still waaaaaaaay up versus where we were in March. Ha!
So got a question, I’m investing with maxing out my ROTH IRA annually ($7K over 50) and 401K ($26K over 50) so what else is there?
I want to pay off my house, no debts except kids’ cars and they both will be paid off at end of year or sooner.
Should I invest $3K on some other investment or pay off my house in about 4 years?
I’ll work another 10 years to 65 or less if I’m not having fun at work…no rush to stop working unless it becomes too stressful. I make $84K from a pension and can live off of that if I didn’t have kids in college.
Thoughts?
It’s an age-old question with no right answer — everyone needs to decide for themselves.
A few posts to review:
https://esimoney.com/deciding-the-pay-down-mortgage-or-invest-debate/
https://esimoney.com/which-is-better-paying-off-a-mortgage-or-investing-more/
https://esimoney.com/pay-off-debt-invest/
Decided back in the ’80’s to just concentrate on real estate. Interest rates were 18% but I just kept buying seller financed properties & learned a lot. My colleagues all insisted I’d go bankrupt, but after years of no vacations, frugal living, driving beaters & hours of knuckle busting rehabs I retired at 40. My colleagues all worked past 65 then took menial jobs to supplement their retirement.
We continued buying more, rehabbing & subsequently selling them to fellow investors & holding the mortgage notes. We achieved being debt free many years ago & held everything free clear.
Our kids all graduated college without any debt & have their own real estate portfolios. In fact our youngest daughter (27) has a net worth of $750k from her astute real estate investing.