Early on in my career I learned that paying myself via retirement contributions and investing was the biggest opportunity to build my wealth. Many of you might not be comfortable with investing because you believe it’s complicated, you don’t trust the markets, or you believe you don’t have enough to begin investing. With that train of thought, you might be making a huge mistake by missing out on this equation:
Time spent in the market (x) compounding interest (=) growth opportunity!
According to Investopedia.com, approximately 10% is the average return for the S&P 500 since its inception back in 1928. Adjusted for inflation the “real return” is more like 7%. Also worth noting that nearly half of the gains from the S&P 500 resulted from dividends. Why would we not take advantage of these rate of returns?
Let me give you an example of the growth opportunity you can have by simply investing. If you’re like me, I have a Netflix and HBO Now monthly subscription and in total that’s $30/monthly. For the most part, I can see myself having these 2 subscriptions for the next 10 years. After 10 years, both of these subscriptions would have cost me $3,600. So what if I were to invest that same amount into an investment account or retirement account?
At a rate of 7% annual rate of return and starting with $30 as the initial investment and contributing $30 monthly, you’ll end the 10 years with $5,032.94. That’s a 28% return in 10 years! If you want to double check my math, multiply $30 x 12 (months) x 10 (years) = $3,600…this is without the 7% average annual return. The difference is $1,432.94 from the projected $5,032.94 had you invested in the market and that’s a 28% gain!
By no means am I saying to cancel your Netflix and HBO because I wouldn’t be able to live without these subscriptions! LOL. But this puts it into perspective and how you could begin investing in yourself and to build wealth. This same train of thought can be done with your employer’s 401(k) plan, especially if they offer to match between 2-6%.
Time Is In Your Favor
You may have heard this from everybody and their mother’s, but it’s actually very true! The best case I can present to you is by showing you an example of someone starting to invest at 25 versus someone starting at 35.
Let’s keep the scenario simple:
- 7% annual rate of return
- $5,000 initial investment
- $100 monthly contributions
- Both retire at 65
The 25 year old will retire with approximately $314,434! The 35 year old will retire with approximately $151,414. That’s a $163,020 difference!
Even if the 35 year old were to double his monthly contributions to $200, that person would still be short $49,667 compared to the 25 year old. The 35 year old could have made a $25,000 initial investment with $100 monthly contributions and STILL be behind of the 25 year old by nearly $10,000!!!
The skeptics out there must be thinking, yea but you run the risk of loosing the money if the market crashes. Well, of course you do and anybody who invests must know this going into it. But you can soften the blow of a hypothetical market crash by not investing without having an emergency fund.
The bottom line is live below your means by having a monthly budget, grow your emergency fund, be debt free, contribute the yearly maximum to your retirement accounts (401(k)s and Roth accounts), and dedicate what is comfortable for you as monthly contributions to an investment account.
The sooner you begin, you’ve got the potential of larger gains. Make your money work for you! Don’t overlook the power of compounding interest.