This is a rare topic that I haven’t gotten to address yet explicitly, and I’m glad I now get the chance—I recently heard from a reader who mentioned that she enjoys her job, is quite good at it, is certain of her job security, and does not see the point in investing.
It’s a perfectly fair question, and I’m glad she asked me it.
Here’s how I think about it.
Part of my explanation has to deal with seeking prosperity, and the other part of my explanation has to deal with ensuring survival.
First, let’s talk about prosperity. Because the writer said she worked in retail, I’ll use that as an example. Let’s say that you are the manager of a very small boutique clothing store, and you make $60,000 per year. For all of your hard work, you will get about $5,000 per month (and then you’ll have to pay taxes on it). At the end of the month, that’s it—if you want another $5,000 in January, you are going to have to give up 200 hours of your life to get it. And if you stop showing up, you will get $0. It’s over; every dollar that makes its way to your pocket hinges on your giving up time in that moment.
Now, imagine for a moment, that you own that same store instead of being an employee (and you are a heavily involved owner). You may put in the same amount of hours as the manager, you may perform work that is substantially the same as the manager, and you may even run a store that grosses $50,000 per year after taxes and paying all the employees.
There is a critical difference, though, between your situation and that of the manager earlier: you could take a nap for a month, and you are still the owner. You may have some catching up to do, and your business may start to hurt if you make this a habit, but you are in no way divested as an owner. Employees get fired by their bosses all the time; bosses don’t fire owners.
And even if you are a constant presence and put in just as money hours as the manager, your $50,000 per year is qualitatively different from that $50,000 earned by your manager. When the manager of the store decides she doesn’t want to do the boutique retail thing anymore, she has to move on, and sell her time to someone else to make money. If you, the owner, decide you don’t want run the business anymore, you have an asset that you can sell for $250,000-$500,000, depending on the quality of your business, interest rates, and the general economy at the time. The owner of something profitable gets a big payout at the end, a worker for a profitable business might get a cookie cake party upon leaving at the end.
Business interests are the key to prosperity in a way that labor is not. When you get $1,000 in labor, you have to go out and sell your time again if you want $1,000 more. When you get $1,000 per year in dividend checks from General Electric, you only have to avoid selling for the same thing to happen next year (and given that GE is raising its dividend substantially each year post-financial crisis, you are likely to get an annual raise around 10% as well).
Oh, and did I mention that this “automatic” money from General Electric gets better tax treatment than money generated from your labor, because you are paying double taxation in that the corporation has to pay a tax on its profits and then it has to pay another tax when it hands those profits over to you?
But there is even more of a difference beyond that. When your salary doubles, that’s it—you get the salary double. But when General Electric doubles its dividends (or, more precisely, doubles its profits), then you will also be able to double the amount you can sell the stock for, if that becomes necessary. Business income packs all these virtues together in a way that makes enrichment much easier than having to do it from labor alone.
Why not hitch your life’s fortunes to a wagon like that?
The other reason why someone satisfied with their job might want to pursue investing, and in particular, business ownership has to do with survival. Even if you’re satisfied with things right now, what if the market for your job changes? What if you get worse at your job, have a significant slip-up, and you are fairly fired by your boss? Or worst of all, what if you are an excellent employee, and you are either asked to do something against your deeply held moral views or get fired for an arbitrary reason? Do you think it’s easier to be a woman of integrity with $35,000 in automatic dividend income coming your way, or someone with minimal savings and general reliance on your job to pay your mortgage, food, and utility bills?
Part of the reason why people invest is to get rich, and the other part comes from a recognition that you shouldn’t expect life to be a transition from one fortunate situation to another. At the very least, constant employment that brings you satisfaction shouldn’t be the assumption—it should be regarded as a blessing. If you are happy with things now and are not investing, the question is: Well, could you lead a more dynamic life if you had more money? And, on the other side, could you survive if your employer wielded power against you in a way you do not presently anticipate? This is the kind of thought process that triggers someone to begin investing in the first place.
Originally posted 2014-09-29 08:00:14.