Most of us including myself are guilty of not investing at a proper time and then ruing the fact that you have missed the bus. Hopefully most of you reading this are young enough i.e. younger than me to invest in some sensible instruments and make huge amounts of money when you retire.
When I was young and started earning at the 24 ( now 35) all I could think of doing with the money was spend on new tech gizmos and games. I am a huge tech freak and at that time gaming was something that I was so addicted to.
So to give you an idea as to how much I have lost by not investing initially I have done some comparisons.
I am using a simple calculator to do my math. This is available to everyone to use and see for yourself as to what you can do with your money in the long term.
I am using the compound interest calculator to calculate what will the money at the end of 41 years when I am ready to retire at 65. Here is the calculator on Monychimp.com that you can use.
I am assuming that I will get a return of 8% using simple index funds and ETF’s.
If I start investing $1200 annually for 41 years then my retirement corpus would be – $ 363,892.23
So here is the calculation in detail:
Total money invested is $1200 x 41 = $49200
Money at the end of the 41 years = $363, 892.23
Unfortunately I started investing only a year ago i.e at the age of 34 which means I have only 34 years to see my money grow.
So the total invested is $1200 x 31 = $37,200
Money at the end of 31 years = $159,856.24
This is less than half the money that I will be making had I invested at age 24. Sad but true that it happens to many of us. Also the fact is that we tend to lose a hell lot of focus and patience even when we start early.
Also, the assumption is that you will not increase the investments each year. If you were to increase the investments each year, I am sure the corpus would be even bigger.
Yes you would argue what investment will give 8% returns and the answer lies in the index. The S&P 500 has given a return of 10% on an average on a longer term basis.
Read on as I am going to suggest some investment vehicles which I know for a fact will do great 40 years from now also. Ignore them at your own peril.
Investment number one is – SPY – SPY is symbol for State Street S&P 500 ETF. This is one of the best ETF’s out there with an expense ratio is .06%. That is very low as others charge about 1, 1.5 and in some cases 2 %. In a longer term that can mean a lot of money. This is the best ETF and essentially investing in this one means that you are invested in all the 500 stocks without the issues with investing in all the stocks. Also you need that much money to invest in each of these stocks. There are other S&P 500 ETF’s that you can buy. Vanguard has one which is by the symbol VOO.
Investment number two is – Open an IRA
Now IRA is a good way to accumulate wealth till retirement with fewer amounts of taxes paid on the investments. You should max out your IRA’s every year. Even though you are using your 401(K), I would suggest that you should open up a Roth IRA.
Investment number three is – Real Estate
This is risky however worth the risk. Invest in a property that will give you rental income. Do not buy a property for staying. Start looking out for a small property that will give you a rental income. It will generate you good returns if you start investing that rental income.
The challenge that you will face is getting a mortgage, so make you sure that you have a good credit score.
Investment number four is – Emergency savings in an online high interest savings account. This is a must and most young adults will never do that. I have done the mistake. This is your savior my friend. It will help in bad times. I was fired at my last job and this helped me tide over three bad months of no earnings. The question is that how much should be your nest egg. I have about eight months worth of salary as my emergency fund. Yes, it took a lot of effort and time to build this emergency fund. However the fact is that it now gives me a peace of mind that I have that much amount easily available for any emergency.
And do not keep this money idle invest this in a online savings account and that will make some money for you.
Investment number Five is – Dividend Investing
There are some good stocks out there which can definitely help you make good money on dividends. There is an investment strategy called DRIP investing that will help you do that. S&P publishes a list of Dividend aristocrats in which you can invest. These aristocrats are companies who have a history of paying dividends and have good governance.
Invest direct in the dividend plans of these companies and you can build a good retirement income just by way of dividends.
If you wish to know more about the Dividend Investing then this book here is a good read. For $2.99 it is totally worth it.
P2P lending – This is one thing that I have not tried however have heard really good things about it. You can make good money from it however not sure what are the risks involved here. Try it for yourself and get on with it.
Before I end I think the main thing for the young adults would be to have patience abd perseverance. Do not lose focus if the stock market is down one year. You are in it for long term, so expect some bumps on the road to wealth.