About 17 years ago, I was looking for an easy way to explain the differences between being an investor and having money work for you or being an employee and working for money. I wanted it to be so simple even a 6-year-old would get the concept …. aside from the math, that is J. So, I created Ian the investor and Eric the Employee
Of course, it could have just as easily been Emily and Irene. Sorry, I was once reprimanded by a lady that one of my brochures didn’t depict enough women. But being a man the story of Eric and Ian resonated with me so please accept my apology in advance if I have offended anyone.
I have also kept it simple by not factoring in any tax as each investment strategy can vary from country to country and, quite simply, it made the calculation a whole lot easier.
Now, what you need to know about Eric and Ian is that they both started out exactly the same. They were the same age, had the same job, worked at the same place, ate lunch together, went out for drinks together and even socialized on the weekends…. up until the day that Eric ran out of time, that is.
Introducing Eric the employee
Imagine if all Eric did was work for money. That the exchange of his time was the only way he could make money. Let’s also pretend that Eric earns $10 per hour. Assuming he works 8 hours a day, five days a week, he could earn a maximum of $400 per week or $20,800 a year. Now, as I said above, there is no tax factored in which makes it much easier to calculate.
Now, if Eric wants more money, he has to work more. So, let’s pretend that he is also able to work weekends 8 hours each day adding an additional 16 hours a week to his workload and about 64 extra hours a month. This means the most he can earn in a week is now $560 or $29,120 a month.
But it’s still not enough money as Eric and his family like to buy a lot of stuff, live in a big house, drive 4 brand new cars and there never seems to be anything left over at the end of each month. So, by some miracle he is able to double his time at work. Now he does 16 hours a day, 7 days a week, which is $1120 per week or $58,240. Besides this, he has no life and failing health.
Now let’s get crazy here and imagine that Eric can go without sleep (The perfect employee J) so he can now work 24 hours a day, 7 days a week, which is $1680 per week or $87,360.
Unfortunately for Eric, he has reached the limit. There is absolutely no way he will be able to make one cent more than $87,360 per year. Quite simply there is no more time left in the day for him to exchange for money. So, no matter what happens, he will never ever be able to surpass this.
Introducing Ian the investor
As I said above, Eric and Ian both started out earning the same amount of money but Ian decided to save as much as he could and managed to save $20,800 to invest which is the same amount Eric was making annually in the beginning of our story.
So, Ian goes out and Invests his $20,800 @ 24% per annum (yes I know this is high but its only meant as an example). Now before we go any further let me introduce you to the rule of 72 which is just a simple way of working out how long it will take your money to double. For example, if you made 10% a year it would take about 7.2 years while, if you managed 36% per year, then it would take 2 years to double. And, if the bank gave you 1% a year you would double it in only 72 years. Sadly, I don’t know how long it takes to double your money in a zero-interest world because you need to be earning interest to grow your money L . But at 24% it means that within 3 years Ian has $41,600 and 3 years later he has $83,200.
So, within 6 years Ian our investor has amassed almost as much money as Eric has for working an entire year at 24 hours a day.
In nine years Ian has $166,400. Within 12 years he has $332,800, after 15 years $665,600 and, after 18 years, Ian has $1,331,200. Eric the employee would have had to work 64 years at his original wage of $20,800 to earn this much money. Or 15.2 years working 24 hours a day to achieve the same result Ian the investor did by investing only one year’s wages 18 years ago.
When you take into account that Ian kept working while his money was invested and only worked 8 hours a day so he could have a life see his kids grow up and spend time with the family and his friends he is WAAAY in front.
And now it’s time for retirement So Ian has put this money into something returning 10% a year and he now makes $133,120 a year in interest which is 6.4 years of income from his original $20,800 a year job. Best of all Ian doesn’t have to do a thing for it and he makes his $133,120 a year without ever eating into the principal, meaning that he can live as long as he wants without fear of running out of money and, when he finally does pass, his family will get the $1,331,200.
Making money is a hobby that will complement any other hobbies you have, beautifully.
– Scott Alexander –
To get rich, you have to be making money while you’re asleep.
– David Bailey –
OK so the part about no tax was indeed a fairytale as was the consistent 24% a year each and every year in this current market climate.
But the good news is that the 10% at the end of the story is indeed possible.