How much interest income can I expect on $12 million? Can I live well off that income? (from Quora)

Good question. I’m assuming that you’re asking this question because you are, for whatever reason, expecting to be the recipient of $12 million. This could be from an inheritance, the sales of a business, winning the lottery, or something else. Whatever the source of the funds, congratulations!

I’ll also assume that after taxes, you’ll be left with $12 million, however, that may not be the case. Consider that depending on the source of the income, the location in which you live, and other factors, you may have to pay a significant amount of tax on the amount of money you receive. Consultant a qualified accountant or tax professional for help with calculating your tax liability.

Now to the exciting part… how much income can you expect to earn off of $12 million in cash?

The answer largely depends on your risk tolerance. You used the word “interest,” but I’m assuming that you’re open to investment vehicles other than those that pay interest. Bonds typically pay a “coupon” (similar to interest) and some stocks/equities pay dividends.

Investment approaches vary wildly — and yours will likely be based upon your philosophy on money, risk tolerance, and your age and future plans. You could put all of your funds in a high-risk, high-reward stock and significantly increase your assets (or lose it all). I wouldn’t recommend that approach, though.

The polar opposite would be to put the money into bank accounts, money markets, and CDs — which typically pay anywhere from 0% annual interest to 1.75% in today’s market. Some would argue that this approach would not keep pace with inflation, and while that would lead to a whole separate discussion, they are in many ways, correct.

A reasonable strategy would be to combine approaches. Don’t expect to “beat the market,” but understand that the market has ups and downs.

Here are examples of return on a few different approaches.

  1. Put it all into municipal bonds (but be sure to diversify, and consult a professional for help with this since there are complexities — don’t invest too much in one municipality or bond issuer, and ensure that bonds are rated well or insured by a reputable insurance company). Typically these pay 2–3.5% and income is generally tax-free if you live in the US and in a state where there is no income tax or you purchase your own state’s bond.Assuming all $12 million is invested in municipal bonds, assuming a reasonable rate of 2.5% (you can do better or worse), expect $300,000 in tax-free income annually. Depending on your tax bracket, the tax-equivalent yield is probably $400,000 – $500,000 annually. This means that if you had a taxable investment, you’d have to make $400k – $500k to do as well as $300k tax-free.
  2. Put it all into S&P 500 stocks, or better yet, an S&P 500 ETF. According to this article, the S&P has averaged 10% ROI since 1928. This assumes that you have a long-term time horizon, because in any given year, you may gain or lose a significant amount of value. Over the long term, we expect the S&P to live up to its historical averages, but there is no telling what the future holds.Assuming all $12 million is invested in the S&P 500 with an average rate of return of 10%, expect $1,200,000 of annual return (not necessarily “income”). Depending on your tax bracket and how long you hold the stock you buy, your keep will a bit lower — probably in the ballpark of $960k, +/-, though it greatly depends on your tax bracket and overall tax strategy. I’m assuming a long-term buy and hold strategy, which has you paying long term capital gains on your income rather than ordinary income tax. Keep in mind, though, that you cannot expect to receive a “coupon” or monthly/quarterly/annual distribution of profit. If you invest in dividend stocks, you may receive a dividend, which you may or may not choose to re-invest. Beware that during the Great Recession of 2008–2009, the S&P 500 index fell 57% from October 2007 through March of 2009. There’s no guarantee that you will make money each year. This is a longer-term strategy and you should not rely on this for any regular level of income.
  3. Put it into Bitcoin and hope that the current value of $8,200 as of this writing increases by 15% per year or more. While this approach carries significant risk and I would not recommend it (at least not for your entire $12 million), I include it here as an example.Assuming all $12 million is invested into Bitcoin, you can expect $1,800,000 in annual return. Your income, once again, depends on whether you sell Bitcoin or otherwise use it’s value to purchase goods/services, or if you hold it as an investment. Your “keep” depends on the IRS’ tax treatment of bitcoin.

There are a myriad of other approaches you can take, ranging from lower-risk to higher-risk.

The proper strategy for most folks generally involves a combination of approaches to ensure that regardless of market conditions, you can rest assured that you will not lose a significant amount of value and that you’ll continue to see ongoing income.

Your strategy may involve holding a certain amount of cash in low-risk, low-interest bank accounts or money market accounts in case of a market crash or recession, so that you can take advantage of the buying opportunity.

Warren Buffet’s Rule #1 is “Never Lose Money.” His Rule #2 is “Never Forget Rule #1.” This is important — and there are portfolio strategies that can limit your losses. Diversification is very important in this respect as well.

Mansions and Ferraris, or Safety & Security — You Choose!

My take? In your shoes, I’d take a fairly conservative approach. Unless you have dreams of living in a mansion with a fleet of Ferraris and Lamborghinis (or you have an extremely large family or other unusual expenses), $12 million puts you easily into “set for life” territory — as in, you never need to work again — or you can focus on a career that you love, regardless of what it pays. With very little risk, you can easily earn $200,000 – $300,000 in income, after taxes. While I’m not recommending that you take the lowest-risk approach, I’d recommend being cautious. A higher-risk approach can have greater rewards, but unless your desired lifestyle demands greater rewards, you may be able to sleep better at night if you play it safe.

Is it a bad idea to invest your life savings into an individual stock you believe in?

Question from Quora: I don’t believe in investing in some boring stock not touching the money for years and making 6–7% a year if you are lucky. I want to pick one stock that I trust will do well and double or triple in value but has a high risk factor, is it really a bad idea if I use stop losses?

Yes, it is a bad idea. That being said, I suppose that it depends on how much money makes up your “life savings.” It also depends on how much this money means to you, and how long it would take you to recoup this money if you lost it.

No company is infallible. Even if you think a company is great and has no chance of failure, think again, and look at history.

In 2008–2009, corporate mega-powers and banks were bankrupted or acquired for pennies on the dollar. Companies like Lehman Brothers, Washington Mutual, General Motors, and Chrysler were not immune. What makes you think that your favorite company is immune? Sure, in hindsight, we can see why some of these companies were at risk. But hindsight is 20/20, and few if any saw the Great Recession approaching.

With government bailouts, some of these companies were ultimately restructured and are still around today in some capacity, but if you were using stop losses, you would automatically be giving up on the company after the stock value declines by a certain amount.

To me, this approach sounds more like gambling than investing.

 

Consider this: If hedge fund managers can be beaten by monkeys, what makes you think you’ll do a better job at picking the best stock?

While 6–7% returns may seem “boring,” Warren Buffet’s Rule #1 is: “Never Lose Money,” and his Rule #2 is: “Never Forget Rule #1.”

Consider the impact of losing your life savings and having to rebuild from scratch. I won’t go through the financial modeling exercise here, but even a 20% loss could have a very negative impact on the ultimate value of your savings — let alone losing it all — which is far from impossible when putting all of your eggs in one basket.

While, from a strictly financial standpoint, you are better off investing in multiple low-fee ETFs that represent different markets, countries, and economic sectors, if you feel compelled to invest in one company because you truly believe in that company, I wouldn’t rule it out completely — but I’d limit it to a small percentage of your life savings.

You may be limiting your gains, but in my mind, more importantly, you’d also be limiting potential losses.

Only you know your risk tolerance… but if investing in your favorite company provides you with some level of excitement, then go for it — just remember that the potential worst-case scenario is that you could lose your entire investment. Therefore, if you only invest 10% of your life savings into this one company, an unforeseen catastrophic event that puts this company out of business would only impact a small portion of your life savings.

Plan accordingly and do not put all of your eggs in one basket.

 

I inherited $400k. Is it better to pay off my $400k mortgage, or invest the money? (question from Quora).

Here’s the back-story — a Quora user asked this question, and stated the following:

I’m 30 years old and bought a house a year ago, valued at ~750k on Zillow, and I owe $400k (4.25% interest) on it.

I’ve always liked the idea of living mortgage free, but is it worth paying off the lower interest rate (4.25%) that also gives me a tax break (for itemized taxes) vs. putting the money into investment (6% + return)?

It feels riskier to invest the money even if it does give a higher return….what’s the smart move?

(I have no other car/student/credit card debt and do have an emergency fund of 1 year living expenses saved and work full-time.)

My answer:

Others here have given good answers — and strangely, despite their recommendations being opposite, I am a fan of the posts by Masa Kawa and M. Taylor. Both make good points.

It’s a tough decision, but there are pros and cons to each approach… and in my mind, the decision of which choice is “right” depends not solely on the numbers — but on your future goals, your mindset, and a few other factors.

Let’s get started!

Step 1: Take a Minute to Consider Each Question Below

  1. What is your outlook on your own financial future? You mention that you have a one year emergency fund and that you work full-time. That’s a great start! Still, do you think that there is a good chance that you’ll need to tap into the $400k in cash any time soon? How stable is your job, and if you lost it, what are your prospects for finding another job quickly?
  2. If you had $400k in cash, how likely are you to spend it poorly, or invest it poorly? In other words, is it “safer” being tied up in your house?
  3. Sanity check to help confirm the validity of your answers to the above two questions — what is your track record in terms of financial responsibility? You have a 1 year emergency fund and a full-time job — and again, that is a great start and indicates to me that you’ve been responsible, but only you can answer this question.
  4. What are your plans for the future? Some of the questions below may seem unrelated, but bear with me — you’ll see how they play into your decision:
    1. How long do you think you’ll live in this house?
    2. Do you ever plan to start your own business, or make a non-traditional investment?
    3. Do you envision your salary going up? Down? Or staying the same? Do you think you’ll remain in the same line of work, or that you may be seeking a change in a few years?
  5. Psychologically, does one approach just “feel” right? Some people hate making a mortgage payment, and even if it’s not the best financial move, they love knowing that their house is paid off… Think about what feels right — but before making a decision, read through the rest of this post and think through every aspect of the decision.

Step 2: Consider The Options

Investing
Comparing the potential return on investment of paying off your house vs. investing in something else, it’s admittedly a tough call. Sure, the S&P 500 has shown about 10% annual returns since 1928, which, adjusted for inflation, comes down to about 7%. That sounds great — but once you tack on tax liabilities, depending on your tax bracket and your trading strategy, you may lose another 20% or more on taxes, bringing you around 5.6% or less.

While no one can truly call the market, many believe that because we’ve been in a bull market for so long, we are due for a correction soon. It’s impossible to truly know when or if a correction will take place — however, history has shown us that there are no guarantees — and if you will need access to the $400k any time soon, it may not be smart to invest it all in the stock market. Had you done so just before the 2008–2009 crash, you may have lost up to 54% of your investment over the course of 17 months. It’s hard to get timing right.

You have a one year emergency fund — if you believe that you could get by without any salary for one year, and you don’t expect to lose your source of income any time soon, you may be okay with taking a longer-term approach. If you have a 7–10 year time horizon, your returns over time will likely exceed the cost of mortgage interest payments. To further reduce risk and overall volatility, consider consulting a financial advisor, using a “Robo-Advisor” like WealthFront or Betterment, or using a diversified portfolio strategy. Also, don’t invest in individual stocks — instead rely on low-fee index funds and ETFs.

There are too many investment options to list here — you could invest in real estate, municipal bonds, or even your own business idea. These investments have varying levels of risk and return. For now, I’m focusing on what I’ll call a standard/diversified investment strategy. This does not mean investing in your best friend’s latest and greatest business idea after his last 12 have failed.

Advantages to Investing (assuming a fairly “standard” and diversified investment approach):

  1. Likely to earn higher returns over time than you would simply by paying off your house.
  2. Potential to use dividends from investing to pay a portion of your monthly mortgage payment, assuming you choose not reinvest them. This reduces the amount of money that has to leave your bank account each month — and there’s an underlying asset (stock) that will hopefully continue to grow over time.
  3. More liquidity. Even if you invest the entire $400k into the market, if you need to pull some money out, most of the investments I’m talking about above will allow you to do so (sometimes at the expense of paying standard income tax vs. long term capital gains tax). While you could end up having to pull money out during a down market, meaning that you’ve now lost money, at least you can get to your money without asking the bank for a loan or to refinance your house (which is what you might need to do if you used the $400k to pay off your house). And if you’re really in a situation where you need the money badly, it’s probably going to be harder to get a loan from the bank at that point (i.e. your credit may have taken a dip, or you may not have a salary or regular income).

Disadvantages to Investing:

  1. Potentially more risk exposure — though your house could dip in value as well, so it’s hard to say whether or not you’re really subject to more risk.
  2. Could be difficult emotionally to handle occasional losses and dips in the market. If you’re the type of person who can “set it and forget it” (hopefully relying on an advisor or a robo-advisor), then you’ll probably be ok.
  3. You won’t have the peace of mind of knowing that your house is completely paid off — but your investment should hopefully bring you a different type of peace of mind, and more liquidity.

Paying off the House

By paying off the house, you avoid paying 4.25% in mortgage interest. Yay! But as M. Taylor pointed out, after tax savings (mortgage interest deduction), that is likely closer to 3.25%

Now that you’ve paid it off, your money is tied up in the house. The house is a good investment too, right? Not so fast — it may be a bad investment. Over 105 years, home prices rose by under 1% per year.

And here’s food for thought… your house is a great form of collateral to secure a loan. As a business owner who has had to take out small business loans, I can say that it is a bit more difficult to borrow money from a bank without something as straightforward as a house to use as collateral against the loan. Business loans usually incur a higher interest rate and it is difficult or impossible to get a 30 year fixed style loan for a small business.

If you ever plan on starting a business where you may need some extra capital to start the business or grow the business, you may be better off keeping this money and using some of it for that purpose. There’s still risk in using money for a new business endeavor, any way you cut it (as a small business owner, you’d be personally liable to pay it back), but why not take advantage of the beneficial terms that you’ll get on a mortgage loan vs. a small business loan?

On the plus side, when you pay off a house, it’s a “done deal” and you know you can live there without monthly mortgage payments. It may not be the best investment, but it’s a tangible asset and it’s nice to live in the house and not feel like you owe anyone money. On the other hand, keep in mind that many billionaires and other wealthy individuals have in some way used leverage to get there — that is, they have used the money of others (such as a bank) to get there. $400k invested within a brokerage account has a much larger potential upside (and arguably higher risk, depending on how you handle the money) than paying off your mortgage. Even $400k left in cash, if used creatively when the time comes, could yield higher returns than you’d probably see by paying off your house. For example — in the event of a major stock market crash or other correction, you could decide to invest in the stock market then if you’re not comfortable doing so now. Or you could use that money to help you to start your own business when you are ready.

Advantages to paying off the mortgage:

  1. Peace of mind — the knowledge that you don’t owe the bank anything.
  2. As long as you maintain homeowner’s insurance, the knowledge that your money is now invested in an asset that is truly “not going anywhere.” It may decline to some extent in value, but the majority of your principal is safe. It’s worth noting that even if the value of your house declines, you’d still have to pay back the mortgage (unless you want the bank to foreclose on your house). So, investment gains or losses on the house are not impacted by the fact that you hold a mortgage (other than the mortgage interest paid).
  3. If you don’t have the best track record with spending money or making investments, paying off the house will tie up this money and prevent you from spending it or investing it foolishly.

Disadvantages to paying off the mortgage:

  1. You lose flexibility to invest in something that might have higher yields.
  2. That cash is no longer liquid, or easy to access.
  3. You’re no longer leveraging one of the easiest ways for a homeowner to borrow money — which, when you think about it, can be used for whatever you want to use it for. You have $400k and could pay off your loan. By not doing it, you are leveraging your house to get a very low-cost loan, presumably with a 30-year payback. Good luck getting a business loan like that.
  4. Here’s one that most people don’t think of — but you’ll no longer have the bank on your side. Right now, they are working to protect their asset/collateral. This means that they’ll make sure that you have the proper type of homeowner’s insurance policy in place, that your taxes are paid. This may not be extremely valuable, but it’s kind of nice to have someone else keeping an eye on things.

Finalizing Your Decision

Here are some decision-making criteria that would apply to the general public:

Pay Off The House If…

  1. First and foremost — you have an emergency fund that will last you at least one year and cover all regular expenses, and then some.
  2. It is something that you feel you need to do psychologically to free yourself from the burden of the mortgage — as long as you realize that you could probably see greater returns and have more liquidity by putting your money elsewhere.
  3. You have a poor track record with investments and/or spending habits, and you’d rather know that you can’t touch the money.
  4. You don’t have aspirations over the next few years to start a business, take a work sabbatical, or make other investments.

Don’t Pay Off The House If…

  1. You don’t have an emergency fund that will last you at least a year — in which case, consider taking a portion of the money and investing in something very low in risk (CDs or high-interest checking accounts are safest, but also currently offer almost non-existent returns — consider municipal bonds as well).
  2. You may want to take a break from work for a while, switch jobs, start a business, or basically “step into the unknown” in any way in the near future. Some extra cash or other liquid assets will be immensely useful to you.
  3. You want to see the best return on your investment over a medium-long time horizon. Note that it is true that more returns usually mean more risk, however, history has shown us that over a long period of time, it’s extremely likely that you’ll do better by putting your money into other investments.

Keep In Mind A Few “Hybrid” Choices

  1. Consider paying off some principal on your mortgage, which will effectively reduce the interest that you pay over time. You could take $200,000 and pay off some of your principal to put you in a better place.
  2. If it’s the monthly mortgage payment that you don’t like, work with a financial advisor to craft a strategy to use dividend-paying stocks or other investments with ongoing coupons or dividends to put toward you monthly mortgage payment. Or do it yourself by investing in Dividend ETFs (note that I do recommend doing thorough research or working with a professional).
  3. Realize that you’re not limited to any one strategy. You could pay down $100k of your principal, put an extra $25k into your emergency fund, and put the rest into equities (stock and stock-like) investments (or some combination of bonds and equities).

Knowing Your Situation…

To recap your situation, it sounds as though you are in a pretty good place financially. You’ve managed to save enough to last you a year — and not everyone is capable of doing this!

Knowing your situation, I would advise against paying off the mortgage. If you have a long-term time horizon, you’ll see better returns elsewhere, and, perhaps more importantly, you’ll have a lot more flexibility. That said, you know yourself better than I do — the caveat that I would add here is that if you do not pay off your house, be very careful with the money and think long and hard about your goals before you decide what to do with it.

If there is a nagging feeling that you should pay off the house, look at where that is coming from. If you truly don’t trust yourself with the money, that’s one thing (and paying off the house may be best). If you think that it’s the best place to put your money, take some time to challenge that assumption.

 

What are best things to invest in (question asked of me on Quora)?

 

There is only one “thing” that you can invest in that has the potential to reliably yield returns that are significantly higher than individual stocks (or the entire market), real estate, bonds, and all of the other “popular” investments.

This is one of the best kept-secrets in the world of investment, and I’m about to let you in on this secret. Warning: Once you’ve learned what I’m about to share with you, there is no “un-learning” it. What you do with the information is up to you.

The World’s Greatest Investment is… You.

Some may read the above statement and think “wow, that’s cheesy” or “…such a cop out answer — I wanted to hear about flipping houses, recommended stocks, currency arbitrage, hedge strategies, and more,” hear me out — I’m going to explain how investing in yourself can effectively be the best investment you can make — not only in a “touch-feely” kind of way, but also in terms of cold, hard cash.

Investing in yourself will not only yield greater financial returns than investing elsewhere, but will also result in significant personal growth. You’ll build skills, confidence, and passion, which will serve you well for the rest of your life.

Let me explain.

The question “What are the best things to invest in?” can be tough to answer without getting some additional details. The “best” investment choice for you depends on your goals, your age, time horizon, and your financial situation. But there’s one investment that is never a mistake.

If you’re anything like me, you’ve often gotten the feeling that you’re not tapping into your true potential — like there is so much more out there for you, but that certain things are getting your way. These things generally relate to a feeling of “lack” — you feel as though something is missing. Some of the common things that we feel that we lack are:

  • Time
  • Energy
  • Money
  • Knowledge or Ability
  • Passion/Motivation
  • Security/Peace of Mind
  • Love

And when we come from this place of lack, we often limit our true potential because we don’t even know what is possible for us; we don’t know what we’re capable of.

If you’re caught up in the trap of self-doubt, lack, or you just feel as though you haven’t tapped into your true potential, I recommend reading some books. A good place to start would be:

To become all that you can be, it’s important to get in touch with the thoughts, feelings, and “reasons” that are holding you back from your full potential. I could probably write a book on the topic of mindset, however, I’ll simply state that mindset is often the main thing that holds people back from achieving all that they are capable of.

Once you feel as though you’re in the right mindset, it’s time to master the steps of self-investment success!

Four Steps to Self-Investment Success

  1. Learn
    1. Choose topics that interest you. Don’t pressure yourself or shoot your ideas down just because you don’t see how you’d ever make money by learning about “X” — whatever “X” may be. Maybe you want to learn about African Dance, but can’t see how you’d ever make money from that — but don’t worry about this right now. In the worst case, the subject that you learn about may end up being “fuel” for connecting with people in new ways — which may ultimately lead you to new opportunities.
    2. Find books, workshops, and local events focusing on the subject. You can search Amazon for books, do a Google search on the subject, or check out Meetup.com to find local people who share the same interest. You can also check out Coursera to search for online courses.
    3. Read these books, attend these events, and take these courses.
  2. Do
    1. Just to clarify, “doing” may not mean jumping in wholeheartedly. While some may recommend “ripping off the band-aid” or jumping into something fully, you may not be ready for that, and that’s ok. We’re talking about smarting small. Baby steps will help you to determine whether or not you’re on the right path.
    2. With certain subjects, “doing” automatically goes along with learning. You can’t truly learn to play the piano without having a piano in front of you. With other subjects, though, you’ll need to put yourself out there. You may “academically” learn to write by reading books on how to write books, or studying Strunk and White’s “The Elements of Style.” Unless you put yourself out there by attempting to write, you may not know if you truly enjoy this activity, and you certainly won’t be able to gauge your level of ability or improve… which leads me to point “b” below:
    3. Get feedback. Recognize that when you get started with something new, you may not be an expert. All outside perspectives have the potential to benefit you as long as you keep an open mind. Some people may not be supportive and may be critical of what you do because of their own issues or fears — be careful not to let them crush your spirit. At the same time, listen for potentially valid feedback on how you might approach your craft better. This applies to everything, from writing — to sports — to running a business.
    4. Going along with point “b” above, find ways to get consistent feedback, and to be held accountable. In business, consider joining a group such as Vistage — something that will enable you to get honest feedback from peers (who have shared many of your experiences). Or go to networking events and work on forming your own peer group.
  3. Reflect
    1. Are you enjoying what you do? Do you feel that you are building momentum? Note that not every moment may be enjoyable — even if we have certain “natural talents,” things don’t always come easily. As Angela Duckworth said in her TED Talk, the largest predictor of success is “grit” — the ability to push yourself and power through tough situations — so don’t give up too easily.
    2. Do you feel as though the new skills that you’re learning or experimenting with are a good use of your potential? Do you feel like you’re “in the zone” when learning, growing, and practicing this activity? Or do you feel that your time would simply be spent better elsewhere?
    3. Many people stay in the same job for years (or perhaps for life) because they are simply afraid of the unknown. They have a gnawing feeling that they are capable of so much more — but it is easier, safer, and “financially responsible” to stay where they are. Does the skill that you’re learning and practicing help you to feel more alive than you’ve felt in a while? Through this skill, do you feel as though you can be your best self? If you are stuck in a job that you don’t like, does dreaming about leaving this job to work on “X” excite you?
  4. Decide to Make a Change
    1. Here’s where you take action. The earlier steps are baby steps to help you to get your feet wet. Here’s where you basically make a choice. No choice is 100% permanent, but by committing to something and declaring it, you will remove a lot of the doubt in your mind.
    2. This does not mean that you have to immediately quit your job, sell your house, and move to Tahiti to open that surf shop! Smaller decisions are ok too — maybe instead you commit to an intermediate step, like meeting and interviewing ten surf shop owners within the next six months — and saving the money to allow you to travel and do this. The important part is that you remain in motion. Don’t let fear stop you — continue moving toward a goal.

The above process is not a “one and done.” It’s actually an ongoing cycle. For instance, I happen to be experimenting with writing as we speak. While I’ve done a fair bit of writing in the past, I’ve had thoughts and dreams of writing a book. I’ve started smaller by beginning to blog part-time, and posting on Quora.

You may also be at step #1 when it comes to one of your hobbies/interests/professional goals, and step #3 on another. For example, I’m probably at step #2 when it comes to writing — but I’ve already completed step #4 when it comes to starting and running a business. It’s ok for you to explore multiple ideas at once — as long as you recognize that you only have 24 hours in a given day; dividing your focus too much is a recipe for failure.

Here’s The Best Part

Yesterday, I answered a similar question similar to this one on Quora, and then also posted the answer to the On.Cash blog, where a reader commented. The reader, Fille De Finance, pointed out that there are so many free resources, and that investing in one’s self does not necessarily mean spending a lot of money.

I feel lucky and blessed to be living in a time when information is literally at our fingertips. If you’re reading this post, you likely have access to a computer or a smartphone — which means that there is so much information available to you — and not all of it costs money.

I have found numerous books for $0.00 at eBookDaily. These are Kindle books, and even if you don’t have an Amazon Kindle device, you can read these on your smartphone or computer using the Kindle app.

There are literally hundreds of millions of blogs, many of which contain very useful information. If you get creative, there are so many ways to find free information.

More than that, you can use the Internet to connect with people who have common interests and to reach out to people who may be able to help you to learn, grow, and explore.

Risk & Return on Investment (ROI)

So let’s not forget that when investing, there is the expectation of return. When it comes to the stock market, there’s no telling what it will do. If you had invested in certain stocks in October 2007, when the Dow Jones Industrial Average had exceeded 14,000 points, you would have been mighty upset in March 2009, when it reached a trough of about 6,600. There’s always risk in any investment.

What’s the risk when you invest in yourself? Well, there’s risk that you won’t be very good at what you’re trying to achieve — or that you won’t like it — or that it won’t yield any positive financial results. Ultimately, there’s the risk that you’ll spend time, and perhaps some money, and that it won’t get you anywhere financially. One of the main risks is to your pride. Keep in mind, though, that growth cannot happen without failure.

So what’s the upside? It’s significant.

  1. You’ll learn about yourself; what you enjoy and what you do not enjoy.
  2. You’ll be able to “cross something off your list.” If you don’t explore the dreams and ideas that “light you up,” you’ll be left wondering. You’ll use your energy thinking about what “could have been” because you never fully explored the possibility.
  3. You’ll get better a things. Maybe your idea won’t work out or won’t make you any money — but it’ll give you a new, unique perspective that you can share with others, and a good way to make conversation at a party if nothing else.
  4. You may just do very well, financially — or you may achieve enough success for this to serve as your starting point.

With regard to #4, there’s a significant chance that you will be successful. If you’re smart about it, there’s very little downside in investing in yourself, but a ton of potential upside.

This is a concept that experienced investors often call “Asymmetric Risk and Reward.” The amount that you are risking, if you were to lose it all, is much less than the amount of the potential return or upside.

I’ll give you an example of what investing in myself did for me, personally. Sharing personal details is a bit out of my comfort zone… but here goes.

When I was in high school, I dabbled with starting a business that would provide web hosting and data center services. This was really before the days of the Internet, but I was intrigued by all of the potential that I saw in the Internet.

Here are some examples of how I followed the four step process outlined above:

  1. Learn: I read what I could about web hosting and the Internet. In the early 1990’s, information was more scarce, but I read books, dialed into online bulletin board systems (one might consider these an early version of the Internet), and talked to people who knew more than I did.
  2. Do: I pitched car dealerships and realtors on my ideas to images and descriptions of car and real estate inventory online. I guess they didn’t take the 16 year old kid seriously or think that this “Internet thing” would really take off. Bummer. I continued to “do,” though — I learned about web programming (both HTML/design and web-database integration) and found a couple of clients for whom I built sites, and hosted them. I also launched a free redirection service that provided customers a faster, shorter URL for their long web addresses. This is back when domain names still cost about $75/year. I learned a lot about programming and running a small business.
  3. Reflect: I continued to run this side business throughout college, periodically reflecting on where I was and where I could be. I came up with new ideas and plans for the future. I realized that I enjoyed what I was doing — and that I was pretty good at it.
  4. Decide: After college, I worked at a startup company and did some consulting. After the startup went out of business, as many did in 2000–2001. I made the decision that I was going to get my own business going, full-time. I started small, but I did make the conscious decision to devote nearly 6 months to writing code to expand my free redirection service into a hosting business. This ultimately led me to build a business that grew to multiple millions of dollars in revenue annually and over 30 employees.

Now, don’t get me wrong — it may sound “simple,” but it certainly wasn’t easy. After spending about 6 months of developing software and living off of savings, my business launch was far from an instant success.

In the first week, my total sales were about $10 — not exactly the pot of gold that I had imagined at the end of the rainbow. But I pushed myself to learn more about what I was doing wrong and what I was doing right. Eventually, $10 weeks turned into $10 days ($70 week). And with more patience, hard work, and hope, a few months later I had my first $1,000 day! This money was not all profit; I had expenses in running my business.

And even after hitting $1,000/day, I had the naive idea that I had “hit it big” and that I was now “set for life,” only to discover that as much as I tried to automate this business, there were things that I just couldn’t automate. It was a lot of hard work, and I was initially on-call 24/7, 365 days per year. Eventually, I hired people and got help. While running a business was certainly not easy and did not always feel like I was “living the dream,” the experience that I gained was immensely valuable to me, and will benefit me for the rest of my life.

I ran the business for many, many years, and only recently, I merged my business with another business.

I invested in myself — not only financially, but in terms of time and effort to learn as much as I could about a particular subject. I spent a lot of time reading and speaking to resources who knew more than I did. I spent time learning, coding, and experimenting. As I built up my confidence, I decide to spend some money — investing in hardware, software, and staff resources to build my business.

While I look back, I realize that without investing in myself, none of this would have happened.

So what was my true ROI?

I can’t say that the below example is 100% accurate, but it should give you a rough idea.

  1. Years 1–4 were spent primarily learning and experimenting — running the business as side business. I probably spent a few hundred dollars per year in books and other resources. Total investment, $2,000 at the most.
  2. Years 5–7: I experimented more seriously and probably spent about $5,000 on hardware. I earned a few thousand dollars each year, paying back the $7,000 spent to date, with a few thousand dollars to spare (my total business earnings might have been around $10,000).
    1. A “side” benefit here was that although I had my Bachelor’s Degree in Computer Science, it was largely the learning that I did on my own that enabled me to land a very well-paying career as Chief Software Architect for a startup company out of school — earning well into six figures when I would never have been able to do so with my schooling alone — BINGO — instant ROI.
      1. If we simplify this example and assume that $7,000 was invested and that five years later, I made back $10,000 through my own business, and landed a career that earned me at least $50,000 annually more than I would have made otherwise, we are talking about an ROI of over 50% annually over the course of those 5 years. Ok, so yes, I also spent a lot of my time on learning growing… but when you look at the pure financial impact, it’s undeniable that my self-investment made a huge difference. I actually held that job for almost two years, further increasing my returns.
  3. Year 8: I began to work on my own business full-time, and invested about $30,000 into new hardware after seeing some success. I believe that my “profit” was about $50,000 that year. It was grueling — I worked 24/7, and while I loved a lot of what I did not, I didn’t love all aspects of running a business.
  4. Years 9 and beyond: While I won’t expand on every detail, I will say that most years, I was often able to pay myself as much as I would have probably earned at a “job,” if not more. I continued to learn a lot, and built a valuable asset that is still serving me today, both financially and in terms of my own personal growth (helping me to build knowledge and skill, and to create additional opportunities).

Moving forward, what was better was that once I got the business going, I was often able to reinvest profits while still paying myself a reasonable salary — and grow the business even more. Sure, there were tough years when I couldn’t pay myself much at all — but there were also great years.

Before I felt like the business had solid momentum, I made financial investments that felt very speculative. While I had some confidence that I would succeed, I wasn’t quite sure if I would. I spent money that I had earned in other ways (i.e. not produced by the business). This was a bit scary, and a bit exciting. If I do rough math, I’d say that annual returns are easily well over 50% per year.

Where else can you get a 50% annual return on investment?

What is more is that this investment in myself has already had an impact on me personally that I will take with me for the rest of my life.

Seasons change and markets go up and down, but investing in yourself is the only surefire way to yield lifelong benefits.

The Perfect Investment for the “Average” Person

On Quora, someone asked how the average person should invest his or her money.  One of my followers requested that I answer this question.  Below is my answer.

When reading this question, a number of follow-up questions come to mind, such as:

  1. How old is this person?
  2. What are this person’s goals?
  3. Does this person have a family or other people depending on them?
  4. What is the person’s income?
  5. What sorts of assets does this person own? What is the person’s net worth?

There are so many potential definitions of “average.” According to this Wikipedia article, the US Census Bureau reported a mean personal income of $44,510 based on the 2015 Current Population Survey.

To some, that income may seem very low, to others it may seem high, and to others it may seem “average.” My point here is that everyone has different perspectives on what is truly average.

That said, I’d like to give a real answer to this question. Of course, this is based upon my own thoughts.

According to USA Today, the “average” American has $3,600 in credit card debt.

Most credit cards charge interest rates of 15% or more on balances.

Since you’d be hard-pressed to find an investment that steadily and reliably pays more than 15% in the long-term, the unexciting answer is that it would be best for the average American to start by paying off credit card debt.

Next, look at other debts. Without going into too much detail, my rough rule of thumb would be that any debt upon which you pay 7% or more in interest should probably be paid off before seeking other investments. This is just my opinion; there may be some valid reasons to make investments before paying off this debt.

Moving on…

Assuming that there is no high-interest debt standing in the way, one assumption that I’ll make is that the “average” American is not a finance expert.

Taking it one step further, even “finance experts” are not always finance experts. In a world where hedge fund managers are consistently outdone by monkeys, can an “average” person really expect to be an expert investment picker?

My answer is no.

While no answer is the “right” answer and everyone has individual needs (disclaimer: talk to you CPA/financial advisor/yada yada before making any decisions), my recommendation would be to try to remove any thought, active management effort, and emotion from your decisions. It is easy to get emotional about your money, and history shows us that some of the best times to invest is when fear is the greatest.

I’d recommend one of these options:

  1. If you’re in it for the long term, and you don’t need your money for 7–10 years or longer, consider investing in a simple, low-fee S&P 500 ETF (exchange traded fund). This is basically a fund that represents the entire S&P 500 index — without having to invest in individual stocks. The S&P 500 has shown to return roughly 10% (not accounting for inflation) over the long-term, according to Investopedia. An example option would be the SPDR S&P 500 ETF Trust, stock symbol SPY.
    1. Note: It’s never a bad idea to diversify and only invest a portion of your assets into a single index, sector, or country. Therefore, you may want to put some of your money into foreign stocks, emerging markets, commodities, real estate, bonds, and other investments.
    2. For the reasons mentioned in the note above, if you’re investing a significant amount of money (whatever the word “significant” might mean to you), see option #2 below.
  2. Use an online “Robo-Advisor,” such as Betterment or Wealthfront. These are designed for the “average” person because there have very low investment minimums. Compared to a traditional investment advisor, fees are very low (well under one half of one percent). Tools like this can help you to diversify. They automate investment decisions to take the emotion out of it. Once again, I’d still recommend ensuring that you’re in it for the long-term. This means 7–10+ years without needing your money. If you have short-term liquidity needs, you may end up needing to pull your money out at a loss if the market is down.
  3. This one is my favorite option. Consider investing in yourself so you can be more than “average.” Some ideas are as follows:
    1. Purchase self-improvement and personal development books.
    2. Attend personal development and business-related courses and workshops.
    3. Use the funds to start a business that you’ve always dreamed of starting — or at least invest in learning more about how you might approach starting this business.

Let me comment a bit more on #3 because I believe it deserves more attention.

One of the greatest ways to build wealth is to start your own business. If you are smart, passionate, and you work hard, you will likely be able to earn more than you would have earned in the stock market or in other investment options. When you start a business, there is essentially unlimited upside potential. It is difficult to say the same about other traditional investments.

To sum it up, you are better than “average” — so believe in yourself.