Don’t Work For Money, Make Money Work For You!

Most people have money in wallets, in bank accounts, in retirement investment plans. We have a lifelong relationship — at times strong, at time strained — with little green pieces of paper.

Money tends to represent a lot of things. Reward for effort, relief from bills, wishes for our children. Security, perhaps, if we invest it well.

But here’s a fundamental way to think about money that you probably haven’t entertained: Stop thinking of money as something you earn, make more or less of, put away or spend.

Instead, think of money as your employee. Money should be working for you, rather than you working for money. Dollar bills are little green employees, ready to do your bidding.

At the most basic level, of course we work for money. We need it to live and we get it by doing work for others. That’s basic economics, right?

But that’s not how banks and investors think of money. They think of money as a tool for making money, a way of creating new realities.

Money by itself is a losing proposition. Inflation eats away at it. Temptations lead to spending. Just having money doesn’t mean much unless you spend it, or at least that’s the case for most people.

But holding money is how banks earn interest. It’s how investors turn $1 into $2 over time. Money works for them. It should work for you, too.

The initial reaction to the idea of money making money is likely, “Oh, great, but I’m no big wheel investor. I wouldn’t know where to start.”

Increasingly, you don’t have to know where to start, but you do have to start. You can start by putting money into a savings account that pays interest. It won’t earn much, but it won’t be spent, either. Big difference.

Once you reach a minor plateau, say $1,000, you can open a brokerage account and invest. You won’t know what to buy, and the temptation will be to buy company shares you think understand. Probably, you’ll buy Apple Computer or invest in your own employer.

Avoid this urge. Instead, buy an S&P 500 Index fund. It will be instantly diversified and cheap to own. You’ll get Apple and, probably, stock in your own employer, too. Just not too much of it.

Keep doing this, adding $25 or $50 increments, whatever you can spare from your paycheck, basically forever. If you can do this in a 401(k) at work, you’ll reap tax benefits. If you use a personal IRA, that’s also a tax boost.

Money and happiness

Over time, two things will happen. One, your investment will grow. Stocks over the long run beat bonds, cash, gold, everything, returning 6.6% after inflation.

The other thing that will happen is that you will collect dividends on your stock investments, currently at around 2% a year on the S&P 500. Reinvested dividends is why stocks do so well.

In time, your money will compound, doubling every 10 years or so, until you decide to retire. If you manage to hit the magical $1 million mark, you can expect about $40,000 in income from your portfolio, which by that time would include bonds, real estate and other investments.

Most importantly, money will be working for you, and you can do whatever you want with your time — even work and make more money, if that makes you happy.