I’m going to let you in on a secret today – the secret to getting rich. It doesn’t require a lot of time or expertise. In fact, it might only take you a few minutes a year to become a millionaire by retirement. The simple secret? Investing.
Let’s say you adopted the habit of packing your lunch for work instead of buying it, and saved an extra $1,000 a year. That’s awesome! If you did that for the next 30 years until you retired, and diligently kept it in your savings account without spending it, you’d have an extra $30,000 at retirement.
$30,000 is nice – that could be a year of rent payments or a new car (well, the amount of inflation over 30 years might dictate otherwise, but you’ll deal with that later). But it certainly won’t make you rich.
Actually, if you put the money in a high yield savings account, gaining 1% annual interest. After 30 years you’d have $34,785 – not too shabby.
But let’s say that instead you invested the money in the stock market, by investing in an S&P 500 index fund. The annualized return on the S&P 500 for the last 30 years is 8.5% (excluding dividends). If the index grew at that same rate for the next 30 years you’d have $124,215. AND if you reinvested your dividends, past performance indicates you’d be sitting on $207,605.
Quick math shows that you’d make at least four times your initial savings just by investing your money instead of leaving it in cash.
Oh, is your goal to be a millionaire at retirement? Invest $5,000 a year for the next 30 years with dividends reinvested and you’ll reach it.
Whoa, now we’re talking! Oh, and to add on to the benefits of investing, if you hold your investments in a Roth IRA (you can contribute up to $5,500 a year now), you won’t be paying any taxes at retirement either. All of that money is yours to spend – even if you wind up with the million dollars in the last example.
If you hadn’t invested the money though, you’d be left with a paltry $35,000 at the most. Savings accounts have no upsides. This is what millionaires know. Investing has numerous advantages – compound gains, plus less taxes (even if you’re not using a retirement account).
So, by spending an extra hour (if that) of your time this year – setting up a Roth IRA – and a few extra minutes each year after that – adding to your index fund investments – you’d have an extra $100,000 or more at retirement. Would any of you say that’s not worth your time?
I know what some of you are going to ask now… what if I lose it all instead? There’s a reason I used 30 years and the S&P 500 index in my examples. Studies show that low cost index funds held over the long term perform well. Just look at this chart of the S&P 500. If you’d held long enough, you’d come out on top. Even if you’ invested in the peaks before the dot com bust (see 2001), or the recession (2008), you’d be very happy with your investments today.
You could make a lot of money by investing in individual stocks too, potentially even doing better than the index funds. But investing in individual stocks successfully requires research, experience, and an appetite for risk (or a professional to help you).
That’s why I encourage you all to start investing as early as you can. Time – and patience – is your biggest asset as an investor.
Ready to get started? Set up an investment account or IRA (Motif investing is offering an $150 bonus on new accounts), check out low cost index funds on Morningstar, or email me for help setting up a more personalized investment approach.