Time is Money — Musician’s Master Class
By: Concert Pitch
Tags: Saving, Investing, Saving Money, Stock Market, Musicians

Written by Avi Bialo — Financial Advisor

It’s an old joke, “How do you get to Carnegie Hall? Practice, practice, practice.” …But have you ever wondered how much practice it really takes?

Professor Anders Ericsson of Florida State University studied the average practice time of various masters, which ranged considerably, but author Malcolm Gladwell in his book “Outliers” extrapolated the “rule” that 10,000 hours was around the number required to master a skill.

Practicing diligently at anything for 90 minutes per day and continuing for 20 years will surely make you quite proficient. It stands to reason that if you begin at 8 years old, you will achieve the lofty heights a lot sooner than someone who waits until they are 16 years old.

This truth works not only for playing an instrument but also for personal finance. Simple math will conclude that if one were to habitually put money in a savings account continuously throughout their life beginning at age 20, they would end up with more savings than someone beginning at age 40.

Savings vs. Investing

Saving money earlier in life is one of the solutions to securing a larger amount of savings later, but unfortunately the sole act of saving does not do as much good as one might believe.

In the United States, the prices of utilities, services, housing, food, and entertainment rise at an average annual rate of 1.7% — this is called inflation. Unfortunately, due to inflation, our hard-earned dollar is losing value each year. If you were to ask someone circa 1960, how much their first car cost, they might say $2,000-$3,000, compared to the average cost of a car in 2019, which is $37,000. One of the reasons for these rising prices has to do with inflation.

In the corporate world, many jobs have small annual raises built in to combat inflation. Unfortunately, most freelance musicians don’t enjoy this luxury and are subject to the same pay year after year. With this in mind, musicians have to be aware that a $400 wedding gig might be a good rate this year, but 5 years from now, that $400 lost $34 in buying power due to inflation.

With this information, the burden falls onto each individual to increase the rates for their services in order to keep pace with inflation.

As many people save money in hopes of buying a home, saving for college and retiring, keeping up with inflation is a crucial step, but that alone will not build wealth. Previous generations have taught us, investing your hard-earned money is one of the best ways to build wealth long-term and the two most common options include investing in the stock market and purchasing real estate.

For many of us, the world of finance and investing comes with many unknowns, too much misinformation and of course the risk of losing your money.

Just as learning to play an instrument requires the help of a qualified musician and teacher, the same goes for your money, as finding an experienced financial advisor can guide the process of saving, investing and implementing a customized financial plan.

Time vs. Money

There is an old saying that “time is money” and in many jobs your earnings are directly related to hours spent working. It’s also true that time is money when you allow money to grow due to time.

Let’s assume you have $1,000 to open a savings account at ABC Bank on January 1st and the annual interest rate is 5%. How much money will you have in five years?

If the bank simply gave you 5% of your $1,000 at the end of the year, you would have $1,050 on December 31st. If you left the $1,050 in the account to earn another 5% next year, at the end of that second year, you would have $1,102.50. Not only did you earn interest on your original $1,000 in year two, you earned interest on year one’s interest.

This is commonly referred to as ‘Compound Interest’ which is described as “the addition of interest to the principal sum.”

In year one, you earned $50, in year two $52.50, in year three, $55.12 and in year four $57.88

Because you have allowed the money to sit in the account, you are earning money on your original investment plus all the years on previous interest. Of course, not everyone has $1,000 to invest right off the bat, but even with gradually contributing money into an account over a longer period of time, compounding interest will have a significant effect towards your retirement.

Ben and Emma are two working musicians and by the time they reach 20 years of age, they are in high demand freelancing throughout New York.

Emma loves the party life and enjoys spending her money treating friends to drinks, dinners and buying expensive shoes for herself.

Ben is more careful with his money and starts putting $100 aside each month into an investment account saving for his retirement.

Eventually, Emma gets tired of the party life and realizes she needs to start planning for retirement and begins saving $100 a month when she is 30 years old.

Both Ben and Emma earn 6% annual interest on principal, which is a pretty regular rate of return.

What does 10 extra years of savings do by the time they both reach 65 years of age and want to retire?

Ben invested $54,000 total: $1,200 every year since he was 20 years old.

Emma invested $42,000 total: $1,200 every year since she was 30 years old.

At 65 years old, Ben has $255,290.

At 65 years old, Emma only has $133,720.

Ben put in just $12,000 more into his account over those 10 years but ended up with 10 times that amount, a difference of $120,000 more than Emma.

By the time you read this article, age 20 may have come and gone. An old Chinese proverb states, “The best time to plant a tree was 10 years ago. The second best time is today.” No matter how old you are, now is the best time to start investing your money.

If you feel ‘behind’ in setting money aside for retirement, consider putting more aside each year to catch up with where you would be if you started earlier.

In the case of Ben and Emma, if Emma started investing $190 each month from 30 onward, she would have ended up with the same quarter of a million dollars as Ben. At 35, she would have to increase to $270 a month and at 40, she would have needed to invest $375 a month.

As we can see, time is one of the biggest advantages when it comes to planning for retirement. Just as mastering an instrument takes years, wealth building is a process encompassed by saving and investing over a lifetime. With many of us, the hardest step is usually the first one, but starting the process of saving today is the most important step towards financial freedom and a comfortable retirement.