How investing $5,000 a year can make you a millionaire
Jamison Manwaring – Co-founder/Managing Partner/CEO of Neighborhood Ventures
Plan a vacation, buy some furniture, save for a rainy day, or invest in an asset? Having some disposal income available is a blessing. But how do you know if you should spend it, save it or invest it?
Recently a friend of mine, who works in the service industry, told me he saved $10,000 over the past few years. Rather than spend it or save he decided to invest it. Normally I believe that is a good thing, but he hadn’t yet saved for an emergency fund. An emergency fund is 3-6 months of living expenses put away in a savings account. When life happens and unexpected expenses come up, you can always go to this emergency fund. After you have an emergency fund (and assuming you don’t have any high interest debt) then it’s time to start thinking about investing.
Several of his customers told him they made a lot of money in a short time with bitcoin. It perked his interest and he decided this is where he wanted to put his hard-earned money. He sent his $10,000 to an offshore bitcoin exchange. Tragically, the company closed two months later, and he and all of the other investors lost their money. I know how hard my friend worked to save this money and it made me sick that he lost it all in a short-term gamble. My friend decided to invest before he had his emergency fund, which is something I wouldn’t recommend. And worse, he decided to gamble his money in something he didn’t understand rather than invest it in a well-researched asset.
If you invest $5,000 each year, over a 30 year period you would have invested $150,000. The Neighborhood Ventures 12% preferred return would result in a balance of $1,350,000. An 8% return from the S&P 500 index fund would result in a balance of $612,000. A 3% return from a government or corporate bond would result in $245,000 and a savings account that returns 0.25% would result in a balance of $156,000.
As someone who has been investing in real estate since my early 20s and worked on Wall Street as an equity analyst, I believe its critical that you should only invest in what you understand! If you can’t explain how your investment will generate cash flow to pay you back, then don’t invest in it.
Should you just keep your money in savings rather than risk that you will lose it in an investment? After you have funded your rainy-day fund, you should look to invest excess cash so that those funds can build you wealth over the long term.
Let’s look at a few common options for assets you can invest in and compare those with investing in a local Neighborhood Ventures project.
I am not a financial adviser, and this is a simplified summary of these investment options. But it does give a brief overview of the pros and cons of these investments.
NEIGHBORHOOD VENTURES – 12% PREFERRED RETURN
You can drive by and see your asset
Double digit rate of return
Not liquid. You can’t access your funds for 2-3 from investment period