In my last article I made the argument that fear was the leading cause of young people investing. I illustrated how not doing anything with you extra cash will make you lose money. In this article I will go more into detail about how implementing an investing plan at a young age will make a giant impact on your life. I will also present a few simple steps that will help you become a millionaire.
Long-Term Impact of Investing When You are Young
Compounding and time value of money is a powerful thing. In a prior article, I showed how small changes coupled with time value of money can add up to giant sums of money. Time value of money also plays a huge role for your retirement and is the reason you need to start saving today. To illustrate my point I will discuss two different people. These people are Sally the Saver and Sam the Spender.
Sam and Sally are very similar. They had the same major in college, graduated at the age of 22, and got a job at the same time. Both make pretty good money working. They don’t have too much student debt.
Sam the Spender likes to spend money. As soon as he makes money he spends it. He continues this way until he hits his 30s. It is then that he realizes he has nothing put away, and he needs to start taking his investments seriously. Sam saves $500 dollars a month from his paycheck. He puts this into a stock market fund that returns an average of 8% a year. He continues on this path for 35 years, until the age of 65 when he retires. By the time Sam is 65 he will have put away $1,033,900! He is a millionaire!
Sally the Saver likes to save money. As soon as she makes money she saves it. She “pays herself first” if you will. At the age of 22, Sally begins to save $500 a month. She also puts this into a stock market fund that returns an average of 8% a year. She continues on this path for 43 years, until the age of 65 when she retires. By the time Sally is 65 she will have put away $1,977,500! This is almost twice as much as Sam and all she did was start saving eight years sooner!
Investing at a young age is the best decision you could ever make. When you put away cash when you are young, you open yourself up to so many more options as you age. You could continue to save up as you work. Or, you could have enough money to give you financial independence which would allow for you to start your own business. You won’t be on the constant treadmill where you work for a paycheck only for it to be gone two weeks later. The key here is financial independence. Being free from the shackles of work will make you happy. It will enable you to take chances in life that you wouldn’t otherwise take.
How to Become a Millionaire?
Becoming a millionaire isn’t as difficult as it may seem as displayed above by Sally and Sam. To become a millionaire you must be willing to save money. It doesn’t necessarily have to be a lot, but it has to be enough that will accumulate over time.
Don’t spend money on things you don’t need. You need to create a budget for yourself and stick to it. How can you force yourself to stick to a budget? Pay your investment plan first. Whether it is a 401(k) or just a plain old brokerage account, force yourself to make a payment to that investment plan first. Whatever money you have left over will be used for all of your other expenses you budgeted out.
Big financial decisions can lead to big savings
When you are buying a home or a new car, keep the long-term financial impact in mind. Make sure you can get the best deal you can on a new home or car. Don’t buy something that is unnecessarily big. Live below your means and you will achieve financial freedom. It’s these big decisions that either make or break people financially.
Don’t make dumb investments
If you are new to investing, don’t try your hand at picking stocks. Chances are that you are not going to beat the market. It is hard enough for people who do it for a living to beat the market. My recommendation is to put your money into a total stock market exchange traded fund (ETF). One good ETF for this situation is the Vanguard Total Stock Market ETF (VTI). This ETF tracks the market as a whole, has extremely low expenses, and will help reduce your risk. As you begin to learn more and more about investing, then you can start picking individual stocks.
A call to young people.
Start investing as soon as you can. If you have money leftover at the end of the month, open a brokerage account and begin putting it into a total stock market ETF. The longer you wait, the more you have to lose.