As the Rolling Stones sang back in 1964, “Time is on My Side” — yes it is. The single biggest advantage that young people have is time. If you invested $1,000 in 1964, when that song came out, you would have $114,890. Time is a huge advantage. The longer you have, the more time your portfolio has to grow and compound.
Every additional year that you have allows your money to accumulate through compounding. Compound interest is interest added to the principal of a deposit or loan so that the added interest also earns interest from then on. This addition of interest to the principal is called compounding. As time goes by, the accumulations really start to add up. At first, the increases will seem small, but over time, when compounding really kicks in, you will start seeing massive increases to your investment every year. An 8.5 percent return on $1,000 might only be $85, but an 8.5 percent return on $20,000 is $1,700; and an 8.5 percent return on $250,000 is $21,250. It really starts adding up.
$1,000 to over $26,000
If you invest $1,000 in the stock market, and assume that it grows by a historic average of 8.50 percent, that money will increase in value. After five years, that $1,000 will be worth over $1.500. After ten years, it will be worth $2,260. After 20 years, your investment of $1,000 will have grown to more than $5,000, after 30 years. it would be worth over $11.500, and after 40 years, that $1,000 would be worth $26,133.
$1,000 a year to over $321.816
Okay. $26,000 isn’t all that much money. It’s certainly nowhere near enough to retire on. What if you invested another $1,000 every single year for 40 years? Assuming the same return from the S&P 500, you would have $321.816. Not bad. How many people retire with over $300,000? Not many. That’s just one thousand dollars a year.
$6.00 a day to $1 Million!
What if I told you that six dollars a day could make you a millionaire? It’s true, well sort of — there are a couple of caveats. (This assumes an average annual return of 8.5 percent and you would have to increase your six dollar a day investment by 3 percent each year to allow for inflation.) If you assume these historical returns and invested six dollars a day, and then adjust that amount each year for inflation, you would have $995,232 — nearly $1 million 40 years later.
In year one, you invest $2,190 (that’s $6.00 a day for 365 days) — just put six dollars in your piggy bank and then at the end of the year, invest that money into an S&P 500 index fund. Historically, inflation has been about 2.5 percent a year. So each year, thereafter, we might want to increase our investment by three percent. So in your two, you might invest $2,256, in your three your would invest $2,323, etc. Each year increase your investment by three percent. By the 40th year, your annual investment will have grown to $7,144. That might sound like a lot, but over time, your wages will likely increase along with inflation as well. The average wages in the USA today are $54,699, forty years ago, the average was was $12,705 as indicated by the census. It is quite likely that you will be able to afford the increased annual investment.
Where to Invest
As mentioned above, the projected gains are based on an historical return of 8.5 percent; that’s the long-term average return garnered by investing the S&P 500 — a basket of 500 of the largest companies in the USA. You can easily invest in the S&P 500 via index funds from any brokerage house. Many brokers, like Vanguard, Fidelity, Schwab, TD Ameritrade, T Rowe Price, just to name a few have their own, in house, S&P 500 index funds so you can invest without paying any commission at all if you invest in their funds. They will charge you an annual management fee, referred to as a expense ratio. You won’t even notice the fee, it will be automatically extracted from your account. The expense ratio on an S&P 500 fund at many of these brokers is incredibly small, usually about 10 basis points, that 0.001 percent. So having your money in one of these funds will cost you $1.00 for every $1,000 you have invested with them. It doesn’t get much less expensive than that.
What are you waiting for?
If you are young, start investing right away. You might think that the future and your retirement are so far in the future that you can start later in life. The longer you wait to start, the more money you will have to put aside in order to have a reasonable retirement. Most people completely fail to save and enter retirement with virtually no savings at all. Start saving early. Save as much as you can. Remember, time is on your side. Start now. Your 65-year old self with thank you.