"You working hard or hardly working?" This is one of my favorite questions to ask when it comes to busting balls, especially if someone is truly a lazy sloth. However when it comes to money, it's more of a serious question rather than one to push buttons.
Money continuously circulates in any economy. The rate at which money circulates affects inflation, interest rates. and the economy as a whole. Money circulation is driven by consumer spending, the issuance of government bonds by the treasury and purchase of those bonds by financial institutions and the central bank, and the printing of money by the central bank. This is the rotation of the same dollar over and over at a high level sense, but this can also be seen in every day life.
For instance, the government sets a fixed GST which consumers all have to pay. A customer at a restaurant pays for their meal with GST and tips the server. The server takes his or her portion of the tips (and salary from their employer) and then goes out and buys new clothes which will include a GST expense. The restaurant and retail business owners have to claim the money earned for that night as part of their annual income which will be taxed at a 30%+ tax rate. Each transaction listed in this example involves some sort of tax revenue for the government, yet it stems from the same "chunk" of money. No new money was ever introduced.
Individuals can take advantage of the same phenomena with their own investing. Many people work for an employer that offers some sort of "company share owner plan" where an individual can contribute X amount of dollars to buy company shares, and the employer will match 100% of the contribution to a certain point. Without having to do any work, you have already doubled your money (100% return) based on that initial contribution. Assuming this is a Canadian based company, an individual is eligible to put this matched contribution amount into an RRSP account, which results in a income taxable deduction of 30 to 45% of that RRSP contribution for the following year's income tax statement. The next year when an individual files their income tax and receives the tax refund from the RRSP constribution, this refund can then be put into one's TFSA account to be invested, or put into a RESP education savings account for their kids where the government matches you 20%. After that, you would still have the tax refund left over from the government RESP match, which could be put into a TFSA account to be invested. So the total breakdown of the investment returns would be:
Employer share contribution matching: 100%
Tax Deduction from RRSP Contribution: 30%
Government matching for RESP Contribution: 20%
Left over tax refund to put into a TFSA: 7% average annual return in stock market
At this point, you are stretching your dollars to the maximum and REALLY making it sweat. If the effect of this cycle is still not clear, let's assign some dollar figures to the example:
Assuming a 100% employer match to an initial contribution of $5000 to the share plan, the individual is making $6821 on that $5000, or 136% return by the end of the "cycle". 136% return by simply taking advantage of offered incentives by an employer and the government. You haven't lifted a single finger and the rotation of the same dollar over and over is making that money sweat and providing you with huge returns. The beauty of this principle is the fact that the return on the initial investment is predetermined. The market is known, with no ups and downs, and it's the structure of the investment that you are benefiting from.
Long term investing doesn't have to be a tiresome operation that keeps you up all night sweating and worrying. Compounding returns over time through churning the same dollar over and over is pure evidence of how money can work hard for you after you have already worked hard for it.
Let money do the work for you so you don't have to. Are you working hard or hardly working?