One of the most important lessons in investing is to learn about the power of compounding. In many cases, investing early and regularly can make all of the difference in the world.
Let’s take look at a chart that shows the impact of investing $100,000 by age 30 vs. investing $200,000 by age 45 (assuming 8% average return each year). As you can see, even though the second individual invested an additional $100,000, they will have nearly $600,000 less at the age of 65… that’s a breathtaking difference!
Investing $100,000 at 30 years old vs. investing $200,000 at 45 years old
But what if you haven’t had the luxury of starting to invest early? What do you do then?
Does that $30,000 kitchen renovation really make you that much happier? Did you need granite countertops, new stainless steel appliances, built-in double ovens and recessed ceiling lighting?
Alternately, would new modern cabinetry with a standard countertop at a tenth of the price have been sufficient?
What about that $30,000 pool install? Did it need to be installed in-ground? Did you also need to replace your patio and extend it with high-end interlocking stone?
Alternately would an above ground pool that was a tenth the price have been sufficient?
Do these “luxurious” upgrades really bring you increased sustainable happiness or are you a victim to consumerism, short-term lust for higher-end physical possessions and, of course, trying to keep up with the Joneses.
“Oh my gosh, your life must be so stressful. Dealing with collecting rent, evicting tenants, doing repairs, showing apartments. You must never get a break!”. These are some of the most common reactions I get from people when I mention that I invest in real estate.
Now let’s discuss how “stressful” it really is.
I’ve been investing in real estate since 2010, a total of ~60 months. During this period I’ve had to evict two tenants, one which left amicably and the other which took a 2 month process to evict. I’ve also performed mostly routine repairs every couple of months. The one non-routine emergency repair that I’ve experienced was a unit that experienced frozen pipes two winters in a row and required a few dozen hours to fix properly. Oh and I’ve also had to purchase a spray foam insulation kit and spray the basement walls in one of my units which had excessively cold floors above during the winter months.
Today you have your annual physical at the doctor’s office. You wake up and enjoy a hearty breakfast and then head out for your appointment. All looks well and you’re sent for the typical tests that accompany your annual physical and then your appointment is done and you’re off to work. One week later you get a call from your doctor’s office asking you to come in to discuss your physical. You oblige and head in as instructed.
The receptionist calls you in and you sit down on the patient bed. The doctor walks in and closes the door. He flips through his notes, looks at you and slowly mutters the words “I’m afraid I have some bad news.” Your heart skips a beat as you hear him mutter some words about results and re-focus long enough to hear the dreaded words “I’m afraid you only have one month to live”.
Perspective is a major factor in everyone’s happiness. Two people can live the exact same scenario yet somehow they will almost always interpret them entirely differently. Let’s take a look at a similar scenario described by two different people. Which perspective do you want to frame your mindset with?