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☕️📈 How To Turn Your Coffee Habit into £45,000.
PLUS: How to Passively Save & Invest, The Power of Compound Interest, and more.
Hugo Deane
February 18, 2024
Welcome back to Hugo’s Habits 🧠
To celebrate the launch of the newsletter, click below for FREE ACCESS to our Habit Mastery E-Book! 👇️
In today’s issue:
What are index funds, and why are they so powerful?
The true power of compound interest.
The neuroscience of investing.
How to build a passive investing habit
and more…
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(Estimated read time: 3 minutes)
Best Links This Week ⚡️
Here are the best articles and information I found this week while researching 👇️
🧠 Cool Neuroscience Shit
Why you’re so bad at saving, according to neuroscience (link)
MIT scientist tells what happens to your brain during money troubles (link)
How the brain changes with learning (link)
📋️ Practical Tips and Strategies
A beginners guide to index funds in 2024 (link)
How to invest in the S&P500 (link)
Best money-saving apps February 2024 (link)
🔬 Updates from Research
The Brain Is 'Programmed' for Learning from People We Like (link)
Oxytocin: The Love Hormone That Holds the Key to Better Memory (link)
Are You Depressed? Scents Might Help (link)
New Study Reveals Dynamic Impact of Nicotine on Brain Regions Responsible for Reward and Aversion (link)
🎯 What Are Index Funds?
Anytime the stock market is mentioned, the usual reaction is,
“Nope! Not for me, too risky!”
This is where index funds come in. Instead of picking and evaluating individual stocks and companies, you can buy these funds.
Imagine a basket. Instead of fruits, this basket contains tiny pieces of many different companies' stocks or bonds.
It's designed to track and mimic the performance of a market index (like a list of companies on the stock market).
💡 Why Choose Index Funds?
Diversify Easily: One purchase gives you a slice of many companies, spreading out risk.
Save Money on Fees: Index funds are cheaper to manage, meaning more money stays in your pocket
Simplicity: No need to pick individual stocks. Investing in index funds is straightforward
Steady Growth Potential: Over time, index funds have shown to grow steadily, making them a solid choice for long-term investment.
🚀 Getting Started
Set Your Goals: Think about what you're saving for and how long you're willing to invest.
Choose an Index Fund: Look for one that matches your investment goals and risk tolerance.
Invest Regularly: Even small, regular investments can grow significantly over time thanks to compounding.
Notice the word “compounding”.
Store it in the back of your brain for now…
🚀 The Magic Formula of Compound Interest
"Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it."
Compound interest is the financial equivalent of a snowball rolling down a hill, gathering more snow (or in this case, wealth) as it goes.
It means you earn interest not just on your initial investment but also on the interest that the investment has already earned.
Over time, this can lead to exponential growth of your money.
Let's break down a tangible example. The average person spends about £3 a day on coffee. That's approximately £90 a month.
Now, let's see what happens when you invest that coffee money into the S&P 500 index fund, known for its average annual return of around 8%, over 20 years.
Monthly Investment: £90 (your daily coffee money)
Annual Return: 8%
Investment Period: 20 years
The total sum invested over the 20 years, with a monthly investment of £90, amounts to £21,600.
In comparison, the total value of the fund at the end of the 20 years, assuming an average annual return of 8%, is approximately £53,011.84.
This showcases the substantial growth due to compound interest, where the final value of the fund significantly exceeds the total amount invested.
🧠 The Neuroscience of Investing
Have you ever wondered what goes on in your brain when you make investment decisions?
The field of neuroscience offers fascinating insights into how our brains process financial risks and rewards, influencing our investing behaviors.
At the heart of our investment decisions is the brain's reward system, primarily the mesolimbic pathway, which involves the release of dopamine in response to perceived rewards.
When we contemplate potential gains from investments, our brain's reward centers light up, motivating us to take action to capture those gains.
However, this system can also lead us to overestimate rewards and underestimate risks.
This is the same system that lights up when we gamble, so be careful.
So, what can you do?
Educate Yourself: Learn more about how your brain responds to financial risks and rewards.
Develop a Plan: Create a disciplined investment strategy that accounts for your long-term goals and risk tolerance.
Practice Mindfulness: Enhance your emotional regulation skills to make more rational investment decisions.
📋️ How to Create a Passive Investing Habit
The best time to start investing was 20 years ago.
The second best time is right now.
Time is your most powerful ally when it comes to investing, especially with index funds. So the sooner you start, and the younger you are, the better.
Below I have linked the video I used when I started investing.
It covers everything you need to know. Damien is also UK-based, which keeps everything a lot simpler.
Simply click below 👇️
To establish a passive index fund investing habit, follow these streamlined steps:
Set Clear Goals: Identify what you're investing for (retirement, a house, etc.) to choose suitable index funds.
Pick a Platform: Use a reliable platform like Vanguard for access to a broad selection of low-cost index funds. Vanguard is the best, especially for beginners.
Automate Contributions: Set up a direct debit to invest a fixed amount monthly, automating your investment process. This can be done on the Vanguard website.
Diversify: Spread your investments across different index funds (stocks, bonds, international) to reduce risk. Vanguard has different funds available, based on your appetite for risk. The general rule of thumb is that the younger you are, the more risk you should take within your portfolio. The higher the stocks-to-bonds ratio within your funds, the higher the risk, as stocks are much more volatile than bonds.
That’s all for this week!
Any questions?
I answer all DMs on my socials, or just reply to this email! 📨
So, for next week, PICK YOUR TOPIC!! ⚡️
See you then,
Hugo.
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