[this is a ymoyl update.]

big day today — i made my first investment in federal notes. $2,000 went into a 10-year note at 4-7/8% interest.

the decision to do this was not as clear-cut as i thought it would be. the investments available today are not what they were when ymoyl was written. the days of 30-year bonds at 7% or 9% are gone. investing should seem a responsible action, but how responsible is it to put money toward earning 4-7/8% when i could be using it to pay off my 8.19% car loan early?

i did it anyway for the psychological benefits. after tracking and saving since november and anticipating the buy, there’s a great sense of accomplishment in taking the first step on the path, in knowing that from now on, every day, my money will be making money for me.

so what will i be getting out of this? $2,000 at 4-7/8% is $97.50 i’ll earn each year for the next ten years. that’s $0.26/day. well, it’s a start. 🙂

and what do i need to reach? i amuse myself a lot these days by running numbers through my head. right now, i’m spending about $2,500 a month and always working on bringing that down, down, down. $1,207.55 of that is the mortgage and $343.91 is the car loan, so if we exclude those from what i’ll be paying 15 years from now, i’ll need about $1,000/month or $12,000/year. interest rates may rise again, but if we assume they’ll hold around 5%, i’ll need $240,000 invested to produce cash to live on. if i continue putting away $1,000/month, it will take 20 years.

but not really. that ignores the fact that the house will be paid for in 13 years. let’s say that for the first 13 years, i put away $12,000/year. i’ll have $156,000 invested, and i’ll no longer have rent or a mortgage to pay. the $1,200 that was going toward the mortgage could then be invested, allowing me to invest $26,400/year. at that rate, i could add the extra $84,000 and reach $240,000 in just over 3 years. 20 years becomes 16. i’m then 46 years old and financially independent. if i like what i’m doing, as i do now, i can choose to continue doing it and donate my salary, use it to travel, etc. or i could cut back my job hours and pursue others interests, or leave the work-for-pay world altogether.

at 46. that’s a far cry from the 65 i used to consider the norm.

but even that’s completely bogus. it doesn’t take into account the million things that could happen in 16 years. maybe i become ever more frugal, and the expenses line drops to meet the investment income line long before i expected. maybe i earn more (or earn far less). maybe i come into money from unexpected sources. maybe i invest some money into the house and sell it at a good profit. maybe i move to a cheaper part of the country and the cash from the first house goes toward something cheaper, with a mortgage i can pay off in five years.

also, this reckoning doesn’t account for the fact that investment income doesn’t just appear at the end of the progression; it’s all along the way, and growing all the time. today, my first day of being invested, i earned that $0.26. maybe that’s not much, but it’s $0.26 i didn’t have to acquire through a paycheck. in five years, i’ll be making $3,000/year from investments. since i’ll still be living off the paychecks, that $3,000 isn’t needed, and can also be invested. let’s run the numbers on that a bit. here’s a table showing how the interest compounds:

year savings + interest = year’s
contribution
total capital
1 $12,000.00 $600.00 $12,600.00 $12,600.00
2 $12,000.00 $1,230.00 $13,230.00 $25,830.00
3 $12,000.00 $1,891.50 $13,891.50 $39,721.50
4 $12,000.00 $2,586.08 $14,586.08 $54,307.58
5 $12,000.00 $3,315.38 $15,315.38 $69,622.95
6 $12,000.00 $4,081.15 $16,081.15 $85,704.10
7 $12,000.00 $4,885.21 $16,885.21 $102,589.31
8 $12,000.00 $5,729.47 $17,729.47 $120,318.77
9 $12,000.00 $6,615.94 $18,615.94 $138,934.71
10 $12,000.00 $7,546.74 $19,546.74 $158,481.45
11 $12,000.00 $8,524.07 $20,524.07 $179,005.52
12 $12,000.00 $9,550.28 $21,550.28 $200,555.79
13 $12,000.00 $10,627.79 $22,627.79 $223,183.58
14 $26,400.00 $11,759.18 $38,159.18 $261,342.76

after the first year, my $12,000 investments have earned $600, so i have not $12,000, but $12,600 in capital. in the second year, i not only get another $600 on what i invested that year, but also the interest from the first year’s capital. 5% of $12,600 is $630, so my interest in the second year is $600 + $630 = $1,230. now i have $12,600 (first year) + $12,000 (second year) + $1,230 (interest) = $25,830. not $24,000, but $25,830.

and so it goes, cascading down, getting bigger and bigger. after five years, i don’t have $60,000; i have almost $70,000. in the 14th year, the savings skyrocket — i made the last payment on the mortgage at the end of year 13. i not only hit my mark, but overshoot it by $20,000.

and it happens not in 20 years, not in 16 years, but in 14 years, without even taking other shortcut events into account. i’m 44 years old, with perhaps as many years ahead of me in which work is not something i have to do for money.

it’s mischievous fun to commit these numbers to the screen and wonder how i’ll look back on them. will i be smiling as i see it took even less time than i thought, or laughing at the naïveté that thought i could get through it so quickly?

it doesn’t matter. what matters is that there is a finite time between now and then, and that time is much shorter than i thought. getting started today means that not only the beginning is in sight, but the end as well.

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