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I think I first heard the mantra of “make your money work for you” when I was a kid. I’d also guess that it was my grandfather who preached it. He was able to retire in his mid-40’s before the term FIRE (financial independence / retire early) was even coined.
But it took me years to really understand what that meant. And even once I thought I got it, I still assumed it was just some pipe dream that only the rich could appreciate.
Over the years though, I started to dig myself out of the credit card debt I was in. Then I started saving. And then I started saving even more and more.
Eventually, I began to make better financial decisions because I also started to learn more. I wanted to find better returns on the money that we started to accumulate and that helped.
Even seeing some of those returns though, I still didn’t fully get it. I saw that we were our money was growing, but it still didn’t fully click that this was exactly how you make your money work for you.
Now that we’re living off of our investments though, I can see just how incredible this is. Doing what you can to make your money work for you can be one of the ultimate keys to financial independence.
Make your money work for you – seeing it in action
I retired from my career in IT at the end of 2018 at the age of 43. For the entire year of 2019, we’ve been living completely off of our savings and investments.
This is completely new to us, but it was also the plan all along so nothing too crazy there. I understood that our investments would continue to grow over the long term to help support our endeavors hopefully at least until we die. That’s a little weird to think about, but that’s what investing’s all about.
But here’s where it got real for me.
A year has now passed and we spent roughly $40,000 on our expenses. That may be a lot less or even a lot more than you spend on your expenses every year. Regardless, let that sink in for a minute…
$40,000 is a pretty decent chunk of money that we’ve literally pulled out of our savings over this past year without us working.
Imagine a pot of gold with $40k worth of gold coins in it. If you pulled out that $40k and spent it, what would be left?
Nothing. Absolutely nothing.
$40,000 minus $40,000 equals zero… simple math, right?
But that’s with a pot of gold just sitting there doing nothing (though I’d be pretty happy on stumbling across a pot of gold nonetheless!).
In reality though, our pot of gold was actually helping to replenish itself. Because we followed the idea of looking to make your money work for you, our pot of gold actually grew!
On January 1, 2019, we had a net worth of $1,098,482.
On January 1, 2020, we had a net worth of $1,281,925.
We spent about $40,000 over the course of the year and didn’t contribute anything further to our savings. Somehow though, our net worth still grew by $183,443!
Good old Empower (formerly Personal Capital) to the rescue! A couple of clicks and -BOOM- here’s our net worth graph for 2019…
This is what made me understand the power of understanding how to make your money work for you. Making more money than we spent over the year without us working is such an incredibly eye-opening experience.
Now before you go slamming me in the comments and telling me that the stock market had a great year, blah, blah, blah, know that I get it.
It’s entirely possible that the stock market could have gone straight down the tubes and our net worth might only be half of what it is today. And in all likelihood, that’ll be the case throughout several years of our retirement.
That’s why we have some safeguards in our plans like using the bucket strategy to help carry us during the bad years.
But even so, this one year helped me to finally see just how valuable it is to have your money doing the work for you.
Yes, you could keep working every day to make more money. But if you’re spending everything you bring in on unnecessary crap, it’s not working for you – you’re losing out on this amazing opportunity!
The only way to put your money to work is to save it – a lot of it! And then you need to do something smart with it. Even if you save some money, putting it in a checking account or regular savings account is almost like throwing it away.
You want to put a large portion of it somewhere with a better return. Start slow and do what you can, but the more you can make your money work for you, the less you’ll have to in life.
Where to make your money work for you
NOTE: Just a reminder, I’m not a financial advisor. Talk to a professional before making any changes you don’t fully understand.
We’re all at different stages in life so that means there’s no blanket answer on where to put your money to make it grow. However, this first one should be a gimme…
Online savings account
If you have any money sitting in a savings account at one of the big megabanks, you’re not helping your savings grow. Those big banks pay such a paltry interest rate, you might as well just put it under your mattress. Note, please don’t do that either.
Instead, I can’t see any reason why anyone wouldn’t have an online savings account. This is the easiest way to make at least a little bit of money on your savings. You can open an account online in 10 minutes and make well over 100x what you’re getting in interest from the big banks.
Although the rates have been slipping lately in general, the 1.6% I’m getting at Ally is still 160 times more than I’d get most megabanks. And you still get all the protection of FDIC like any other banks so why wouldn’t you do this?
You then link your account to your checking account whether that’s with a silly big bank or my preference of a credit union. Regardless, once linked, you can move money between the two institutions usually in just 1-3 days.
Any money that you might need in the next 5-7 years should stay out of the stock market. An online savings account is a great and easy way to hold some or all of that cash you build up. It also allows you to easily add to it to continue to make your money work for you.
I moved $10,0000 from my online savings at Ally to a high yield 12-month CD last year. I had never put money in CD before, but with the drop in interest rates over the past year, I wanted to salvage a little bit of the interest I was starting to lose out on.
This was an easy move that let me lock in at 2.40% for the year. Not an outstanding rate but still decent for money that I’ll need in the near future.
This can be a good option if you want a guaranteed rate but you know you won’t need the money for a little while. At Ally, you can lock in from 3 months up to 5 years. You should find similar choices at other institutions.
I’d recommend checking Bankrate first to see where to get the best rates before just jumping into a CD.
Now, the money you won’t need for longer periods of time might be worth a little more risk to get a little more reward…
The stock market
The large majority of our investments are in the stock market. With as well as that’s done recently, that’s why we made more money than we spent for the year… a lot more. But that’s not always the case and you have to be prepared for that outcome as well.
We keep about 5-6 years of expenses in less volatile vehicles like a bond ladder and the online banks. That should help cover us in the event of a big market downturn or recession.
In the long run, however, we expect our money in the stock market to continue to grow over time. Most of what we own is in low-cost total stock market index funds (VTI/VTSAX) in our rollover IRAs and Roth IRAs. A lot of folks, such as Mr. Tako, like to focus on dividend stocks. Either strategy can be prolific.
You can see more of our holdings on my post, The Breakdown of Our Net Worth Savings & Investments.
Rental property / REITs
Another great area to help make your money work for you is with rental property. A couple of years ago, we sold the first rental property I had bought when I was younger, but we still have the duplex we purchased in 2015.
That duplex has been a valuable way to put our money to work. I was a little smarter when I purchased this one so we’re making a much better profit margin on that every year. The exception would be last year when we decided to install air conditioning units on both sides, but that should pay for itself over the next few years.
We use a property manager to handle the day-to-day affairs on the property. That cuts into what we could be making if we did it ourselves, but we made sure those numbers worked with that in mind before we bought it. Also, it would be a little harder to manage the property from Panama than it would be if we were closer.
For those that are intimidated by owning or managing rental property, another great option are REITs. A REIT (real estate investment trust) is a company that owns and handles the real estate fun for you. You can then own a piece of it just like you would with a stock in the stock market.
The advantage of REITs is that they are generally high-yield and payout 90% or more of their profits to investors. Additionally, when you own a REIT, you spread your risk out. You may own hundreds or thousands of pieces of real estate with a single REIT.
If you own one rental property and it goes south, that can hurt you financially drastically. The risk of that with a REIT is pretty slim.
And, of course, owning REITs is a lot more passive than owning rental properties (even with a property manager!).
However, REITs don’t give you some of the advantages of tax write-offs and depreciation as well as other benefits.
In addition to the duplex, we hold a small percentage of REITs in our portfolio as well. That way we get the best of both worlds!
There are other good options to put your money to work so don’t feel these are the only choices (e.g. owning a business). The key is finding where you get the most bang for your buck at a risk level that’s acceptable to you. In most cases, that’s going to be a combination of a bunch of different avenues.
Regardless of how you decide to grow your money, it’s important that you just do it. Save what you can and put it to work.
It’s such an odd thing for me to see our net worth grow while we’re not adding new money in. It’s even crazier to realize that we’re pulling out large amounts of money to pay for our living expenses and our portfolio’s still growing.
I don’t expect that every year but it’s comforting to have that during the first year where the sequence of returns risk is the most powerful.
And that, my friends, is why you want to make your money work for you!
Thanks for reading!!