You Can’t Solve Your Income Problems With Investing

Invest $200 and earn 30% ROI in a year, you will feel two things. One, 30% in the scheme of things is a lot and you may even brag about it. Two, when you realise that a 30% ROI is mere $60, you become unsettled. Unsettled because your target towards financial freedom is $1m.

So you wonder, how soon will I get to $1m if all I can do is to earn $60 more on my $200 per year?

On the other hand, if you earn the same 30% on a capital of $100k, you can see the straight path to $1m. It is so straight line to you and it’s so nearby.

The same 30% different outcomes.

I have an extreme example that I like to use. “200% return on a $200 investment will still leave you with $600 in the end.” Now tell me, is it easy to make that 200% return and how many times you can make it.

When people are plagued with an income problem, the easiest place they run to is the world of investing. The thought is that by investing, they can escape their income problem. If anything, the illustrations so far would have taught you that it’s not possible. Income problems can’t be solved by investing. Investing a long term game of wealth accumulation through compounding.

We run to investing simply because it’s the easiest way out. By doing nothing at all, you can earn 30% more. Who doesn’t like that? We all want our money to work for us. It’s laziness subtly showing itself in us. We want free money that doesn’t require work. Yet, wealth is a two-way equation. It is an interplay between your income and the part of that income you invest in compounding assets.

I don’t think we are unaware of where income comes from or what we can do to increase our income. We know.

However, the thought of investing 3 months, 7 months or 12 months as the case may be in developing a new skill or a new income source doesn’t sit well with us. We want an immediate result. If you invest in the stock market today, you can wake tomorrow and your portfolio is up 10%. Free money from doing absolutely nothing is sweet.

But you can’t solve your income problem with investing. While the 200% ROI from above will still leave you with a paltry income, just 10% on some capital can take care of your year’s expenses. Give or take, having N100m and earning 10% ROI per year means N10m per year. For an average person, that’s more than enough to maintain an upper-middle-class lifestyle. Can you see the power of a robust capital base? And yes, the capital base comes from your income. Else, where will N100m come from?

When you have an income problem the best you can do is to focus on solving that. Don’t be lazy around looking for some 200% that won’t even change your life significantly. People with a large capital base don’t look for that kind of high returns because little is enough in the scheme of things.

Where income comes from

Income comes from value creation. You make money when you contribute value to society.

Value creation may be arranged in the form of corporate employment or self-employment. It doesn’t matter where it comes from as long as someone is ready to pay you for the value you are creating or created.

Income is a societal way of saying “this person has created this value to someone at a particular time, so they can also earn equivalent value from someone else.” Your income is a representation of the amount of value that society owes you.

When is it right to start investing then?

Immediately! Right now is the answer. The fact that 200% on $200 isn’t that much doesn’t mean you shouldn’t get it if it’s available.

Investing should start immediately for everyone. There’s a caveat though. If you have an income problem, don’t obsess too much on investing in assets. Let your priority be geared towards investment in yourself.

That statement implies that if you find an opportunity to invest in yourself with great ROI but that investment would require you to empty your stock or other investment accounts, do not hesitate. You want to transition your career to a more lucrative field and you realise that everyone in that field has done a course. However, doing it for you mean emptying your stock or any other investment account, please do not hesitate. Emptying it already indicates that you don’t have a lot there relative to where you are going. Make necessary sacrifices and you will be fine.

Again, you can’t invest your way out of an income problem.