Is it hard to get rich? Not really, if you’re young.
Its fun to play with financial calculators and see what might happen.
Assume you have just graduated from college, are
about 22 years old and I just started your first
real job. If you put $100 a month in an IRA that
grows at 10% a year, you will have about $865,000
at age 65. 10% a year compound growth is about
what you should exect if the money was invested
in a no-load S&P 500 Index Fund.
So for about $23 a week or $3.30 a day you would
be close to being a millionaire.
If you contributed the full $4000 a year allowed
right now to an IRA (rising to $5000 in 2008),
you would have $2,600,000. For about $11.00 a day,
you would have a small fortune.
If you didn’t want to take a chance with the stock
market because it goes down sometimes, you would
still have over $600,000 if you could get a 5% return.
If your grandmother leaves you $10,000 in her will
and you invest it for the same 43 years at 10% without
adding another cent, you’d also have over $600,000
if you placed it in a tax sheltered account.
Time and the power of compound interest are on your
side. So if you’re in you twenties and want to get
rich, do whatever you have to scrape together that
IRA contribution. Every day you procrastinate is
another day your money is not working for you.
However, most people in their twenties need the money
for more important things, like new cars and HDTV’s.
You also have school loans to pay, children to raise
and the new mortgage to pay off. But if you
prioritize your life and stick to a budget, $11.00
a day is doable, although you might have to scrimp
here and there.
Consider that most people are spending their lives
paying the freight for borrowing other people’s
money. If you save and invest, other people are
paying you to use your money. It’s a lot more fun
to see your money working to help you get rich than
having to work yourself.
Think about the effect expenditures have on your
financial future. If you bought a late model used car
instead of new one, you would probably save $10,000 or
more depending on the model. That
$10,000 as noted above, would grow to almost $600,000
by the time you’re 65 if invested in tax sheltered accounts.
Now look at it from the opposite angle, the extra money
you spend on that new car you yearn for and must
have now, will cost you $600,000 by the time you’re 65
and the car has long since been recycled
into tin cans.
I’d probably buy the car too, but it’s useful to consider
the consequences.
It gets harder to get rich slowly as you get older.
If you wait until you’re 32 and put away $4000 at 10%,
you would have about $975,000, still a respectable amount.
At 42, you’d only be able to
accumulate approximately $350,000. If you’re 50 and
can start putting $5000 away today, you’ll have around
$175,000 at age 65.
Everyone knows that Social Security is not going to
allow for a comfortable retirement. Even if the plan
can continue to pay out forever, which is questionable
right now, the money you receive will be
far from generous and is subject to taxation. And you
might have a good pension plan at work now, but will
you be able to hold your current job to
retirement?
If you have a Roth IRA, you can withdraw the money tax
free after age 59 ½. Imagine having a million tax
free dollars you can play with. It will well make up for
the small sacrifices you have to make
to get rich.
No matter what your age, start saving what you can
now - today. Even if you only amass $100,000, you’ll
be better off than most people entering retirement.
For more financial planning articles, visit
http://www.credit-yourself.com
Source: http://www.ArticlePros.com/author.php?Chris Cooper
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