Greg Lhamon | Feb 13, 2015 | 1
The Best Financial Strategy for People in their 20s (and older folks too)
I have no one to blame but myself. My Uncle Rodge gave me sound financial advice when I was still in my teens, but I ignored it:
Greg…sock away money every month and don’t touch it. Tap into the power of compounding interest. You won’t believe how your money can grow.”
I didn’t listen. And now I’m kicking myself.
Compounding simply means you earn interest on your interest. It is the single best financial strategy for people in their 20s because you have so many years for your money to grow.
Let me show you what I could’ve earned had I heeded my uncle’s advice.
A One-Time Investment of $1,000
Let’s say on my 20th birthday I set aside $1,000 from my lawn mowing job and invested it in an index fund that earned 10% per year (not as difficult as you might think. See the footnote below.).
On my 21st birthday, I would’ve had $1,100. Without adding any more, it would’ve been worth $1,210 when I turned 22.
Not that exciting, is it? But look at the power of compounding over time:
At 30 years old: $2,593.74
At 40 years old: $6,727.50
At 50 years old: $17,449.40
All by investing $1,000 once!
Now you can see why I’m kicking myself.
I didn’t start an IRA until I was in my mid-30s. A really bad move. Waiting so long to start forces me to set aside so much more now because I have a lot of ground to make up.
If you’re young you’re probably thinking, “I’ve got plenty of time,” right?
Well, not as much as you think. You’ll be my age (50 years old) quicker than you think. Time is your friend when it comes to investing. Act soon.
How to Earn More than You Ever Dreamed was Possible
Let me give you a concrete example of how starting in your 20s can make a huge difference. We’ll look at the story of two twin brothers: Frank and Ralph.
Frank waited until he was 40 years old to begin saving for retirement. He saved $2,400 every year all the way up to the retirement age of 65.
Ralph got to it early. He started putting back $2,400 per year when he turned 20 and then stopped when he was 40 and never invested another dime.
They both earned 10% per year. *
You’ve probably already guessed that Ralph has a lot more than his twin brother at age 65.
But how much more? That’s the important question. And the answer will blow you away.
Before reading further, take a guess. Seriously, don’t scroll down until you have a number in mind.
Got it? OK, read on.
Started at 40 and kept investing until he turned 65.
Total invested: $ 60,000
Value at 65: $262,036
Pretty good, right? But let’s take a look at his brother Ralph.
Started investing at 20 years old and stopped at 40.
Total Invested: $ 48,000
Value at 65: $1,664,276
Ralph is now worth $1.4 MILLION more than his brother. And he invested less!
That is the power of compounding.
By the way, this example was taken from Tony Robbin’s brand new book, MONEY Master the Game: 7 Simple Steps to Financial Freedom.A Few Takeaways
- Find the Money to Invest: When you’re in your mid-20s the thought of investing $200 every month seems impossible. But for most people, it isn’t. It may mean buying a used car instead of a new one. Or eating out less. Or shopping at Target instead of Macy’s. Drink Folgers instead of Starbucks (a rough thought, I know, but we’re talking $1.4 million here!). But even if $200/mo is out of the question, start with $50, $75, or $100. If you sacrifice a bit now then you can live a life you never dreamed possible later. We’re talking early retirement and a vacation home in Aspen.
- Find Investments with Low Expenses: Vanguard is a great place to invest because the expense ratios on their funds are so low. Most are below 0.20% compared to other places where the expense ratio is closer to 1.5%. That can mean the difference of tens, even hundreds of thousands of dollars over your lifetime.
- Start Early: I don’t think it’s necessary need to beat that drum again.
Some of you might have aged out of your 20s already. Even so, the same principles apply. Start as soon as you can.
Let me ask you one more question to really drive the point home:
How much would Frank have had to save — starting at 40 — if he wanted to end up with the same amount as his brother when they both turned 65?
You’ll find this hard to believe, but the answer is over $15,000 per year.
Scary, isn’t it?
Don’t be Frank (or me for that matter). Follow my Uncle Rodge’s advice and start saving for retirement now.
Freebie: I’ve created a simple Excel spreadsheet that can help you project your retirement savings. You can download it for free by clicking here.
* The Vanguard 500 Index Fund has earned an average of 11.04% since its inception in 1976. I don’t own shares in this fund and I’m not necessarily recommending it. I share this simply to illustrate that 10% per year is achievable.
If you liked this post, you might also find this helpful: Paying for College: Start a 529 Plan for Your Kids Today
Questions: What’s been your experience with saving early? If you’re further along in years, what advice would you give to people just starting out? Leave your comments below.