This is painful for me. Painful because I didn’t do what I’m about to tell you. Some things are so simple that missing them is akin to forgetting to roll up your windows during a downpour…while you’re driving.
The title is How to be a Millionaire. It’s not a gimmick. It’s just common sense. And the only magic you need to understand is this: Compound Interest.
Why Compound Interest is better than a golden goose
Because geese will eventually die. Even magic ones. Compound Interest lives forever. For as long as there are investments, compound interest is the magic dust that turns one dollar into a million.
Here’s the simple explanation: If you put $100 into a fund that yields 10% annual interest, you’ll have $110 dollars one year from now. Then the interest works on that $110, so the following year you will have $121. One more year and you’ll have $133.10. And so on.
In 30 years you’ll have $1,745. And only $100 of that was your initial investment.
Now it gets real
Okay, time to get serious. $1,745 ain’t gonna feed the kitty. But you’re the smartest twenty-something on the block. You’re going to continue to feed that compound interest monster and make it grow even faster. So let’s take the first $100 of each month’s paycheck and send it off to T. Rowe Price or Vanguard or whoever you think has the prettiest logo. It’s hard to screw this up (before my financial friends get their fur in a tizzy, I will suggest you do a little homework to get the best deal…more on that for another day).
So let’s drop $100 per month in our 10% return fund and see where we are in 30 years (insert sound of olde timey computer crunching). Looks like you got $197,393. Not bad. Still not enough to retire on…but wait. You’re only in your fifties in 30 years. Let’s add 10 more.
$531,111. That’s another $300k for letting it go another 10 years.
Here, try it yourself.
Magic Compounding Calculator…don’t tell ANYONE
Investment Compounding Calculator
Can you afford $100 per month?
That’s up to you. If you’re making $500 per month, maybe not. But you can probably pull of $10. I’m willing to bet that anyone with even the smallest full-time income can find $100 per month. Drink beer? Yeah, you’ve got $100. Cable TV? That is so much more important than not eating Alpo when you’re 65. Eating lunch at McD’s? Gross. And that’s easily $100 per month. And it will kill you. If you’re smoking, don’t even get me started.
As your income grows, of course, you’ll increase your investment amount. A good rule of thumb is give 10% and invest 10%. I’d go as high as 15% invested, especially when you’re young. The next 5 years will contribute the greatest amount to your retirement. Remember the additional 10 years? That ten years increased your portfolio by 60%. The last 30 years contributed 40%.
Sacrifice a Little now so you can have a lot later
I know it’s hard. Your friends are going out and spending their paychecks at the bar, having a great time. I’ve been there. And I’ve been broke and hungover the following Monday. It’s not worth it. Find a new hobby. Trust me, you get more satisfaction out of gardening than drinking yourself into a stupor.
In fifty years, your friends will be grouchy old codgers complaining that the little guy just can’t get ahead. You, however, will be ahead. Far ahead. Because you were smarter. You don’t have all the wonderful memories of nights you forgot, but that won’t bother you too much as you stare out over the turquoise waters of the Caribbean one January day.
By the way, I lied a bit. I did learn, but I was in my mid-twenties by then. I won’t be as well-off as my kids, because they’ll start sooner, but I don’t panic when the job situation looks bleak. I know that the nest-egg is there and I’ll never be the “little guy.”
I hesitate to recommend mutual fund companies, but check out magazines like Money and Forbes. They usually have rankings of fund companies. Note these rankings change every year, so take them with a grain of salt. If anyone has a website they prefer, put the link in your comment and I’ll post it. But the important thing is that you get started today!