Baby is T-minus 3 weeks, so I’ll need to wrap up my 10 investment fundamentals and write a big “How I will Retire By 40″ post before things get hectic. My #10 is to start investing as early as you can. This is one of the most important rule of investing. When you start investing early, time is on your side and your investment have more time to grow with compound investing.
Compound investing is the best thing since chocolate cake because every year your gain from the previous year will become the base line for this year. If you invest $10,000 in 2010 and had 10% gain, then you would make $1,000. So in 2011 you will start with $11,000. If you have the same 10% gain in 2011 then this year’s profit will be $1,100. Every year you will make more and more money. As you all know, our time on Earth is limited so the earlier you start, the more you will have when you stop working.
Let’s look at some hypothetical examples.
Joe starts working at age 20 and invested 10k per year right away. We’ll assume 10% gain to make it simple. In 20 years, he stops investing, but he won’t withdraw the money until he completely retires at 68. He will have $3,351,214 in his investment account when he is 68.
Michelle starts working at age 20 and spends a lot of money on clothes, shoes and purses. She wises up and starts contributing to retirement at age 30 and invests 10k per year for 20 years until she is 50 and then stops. In this case, she will have $1,625,989 when she retires at 68.
They both invested 200k, but do you see the huge difference in the amount accrued at age 68? Even if Michelle keeps investing 10k/year for another 10 years until she is 60, she will only build up her account to $1,860,696. This is because Joe had a 10-year head start on her at the beginning of the race.
Kevin @thousandaire.com made a great retirement calculator. You can check it out and plug in different numbers to see what your retirement may look like. That’s what I used to calculate the numbers above, so if there is any mistake it’s Kevin’s fault. He also made a video showing how you can have $1M when you retire.
OK, I see this calculator is not quite perfect. Michelle’s 10k investment should be adjusted for inflation somehow, but her account still won’t catch up with Joe’s account even with that. Kevin also shows two columns for tax advantage vs post tax account. It’s startling to see how much difference there are in the two. Another lesson learned – put off paying tax as long as you can.
In my case, my dad insisted that I contribute to the 401k when I started working. I wrote a guest post about this and it is up at Budgeting in the Fun Stuff if you haven’t seen it – The Best Financial Advice I Ever Received. Thanks to my dad, my 401k account is in good shape and I may be able to retire early.
Remember – Nobody thinks about quitting when they start a new career so they don’t think about retirement. When we’re young, we just want to spend the money, but think how much you are taking away from your future self. So start saving for retirement as soon as you can and future you will be that much happier.
ps. I will max out 529 for baby while I’m still working these next few years to get him started early. Once I stop working, we probably can’t contribute to 529 as much. BTW, isn’t technology AMAZING? I didn’t even know they can do this. The ultrasound technician pushed a button and we can see him smile and frown, so awesome!