Want to Get Rich? Then Start Young, and Don’t Stop.
The miracle of compound interest enables modest savings to grow into a substantial nest egg over many years, but investing in stocks and other investments can generate real wealth during the same time period.
The best strategy is to start investing when young and keep adding to your portfolio according to a recent post at nbcnews.com.
The NBC report determined that if a family with a median income of $40,500 saved 15 percent in a savings account for 40 years, the total would come to $1.27 million. That’s a reasonable figure for retirement in today’s economy, but there’s no way to determine how things will look 40 years from now. Saving the money under the mattress would only yield $563,436.
The same money invested in stocks–at the average rate of growth of the S&P 500–would yield an astonishing $4.57 million. Nobody has a crystal ball that can exactly predict the future, but nearly $5 million dollars can guard against risks and protect your lifestyle far better than the more modest totals.
It’s Easier to Build Wealth when You Start at an Early Age
Building wealth is easier when you’re young because you can take greater risks when retirement isn’t looming in the near future. However, 63 percent of millennials are now diverting their retirement accounts into savings instead of investments.
The 2008 mortgage crisis and economic downturn might have triggered this behavior, but overcoming fear of investing is critical for young people who want to build real wealth, start a self-sustaining business or enjoy the benefits of a more luxurious lifestyle.
The Costs of Being Reluctant to Invest
Despite being computer savvy, millennials are reluctant to use their skills to research investments, manage the risks and build a diversified investment portfolio. A recent article posted at time.com found that only 24 percent of millennials understand the risks of inflation and the benefits of risk diversification.
Millennials still do a good job of participating in retirement accounts where they rely on each program’s ability to manage risks and choose investments for them. Unfortunately, it’s that kind of thinking that helped to create the mortgage crisis.
There’s no valid reason that millennials shouldn’t take charge of their own investment strategies given their computer abilities, networking skills and communications savvy. The costs of failing to invest when young include:
- Being subject to the income erosion caused by inflation
- Risks of Social Security solvency, which can’t continue in its present form through the retirement years of today’s millennials
- Real-world examples that show savvy financial management is critical to success while ignoring your finances can generate tremendous risks
- Putting off investing or starting a business until older when many people have trouble learning new skills
- Trusting education to guarantee success when most of your peers are doing the same
- Failing to take advantage of time-sensitive opportunities such as companies with high-risk/high-reward prospects
- Trusting others to manage your finances when you should research and monitor your finances
- Time creep that reduces the time you have to build wealth
Investors who invest their time and become intimately involved in their investments can earn a big profit in 10 years. Many people save for retirement during their entire careers without earning this kind of bonus according to a report posted at moneycrashers.com.
Taking Advantage of All Your Financial Opportunities
When you invest, you tend to look at the world differently. Investors are quicker to identify financial opportunities such as investing the maximum in a 401(k) to earn employer-matching funds. Learning about taxes can also help you build wealth because you can qualify for tax incentives, take advantage of untaxed or tax-deferred investments, earn tax-free capital gains by turning over your primary home every two years and find other valuable tax benefits.
Commonly overlooked investment and income generating opportunities include starting a side business while continuing to work full-time, investing in emerging market exports and researching biomedical investments. Biomedical companies often generate big long-term dividends when the FDA approves important drugs.
Nervous investors can gain experience without risking too much money by day trading. This kind of investment is always concluded on the same day so that investors don’t need to worry about what happens overnight.
Your returns from any kind of investment depend on how much you invest, how long you invest and which investments you choose. Real estate is relatively safe, and you can often build equity while financing your property. The rent can cover the mortgage, and it’s possible to generate a cash surplus.
When investing in stocks, you can diversify your portfolio to reduce risks. Take advantage of insurance products that build wealth and protect you against common business and health risks. There are also advanced investment techniques that you can learn to reduce your risks such as using puts and calls to protect investments.
Avoiding Debt and High Interest Rates that Erode Your Savings
Paying down your debts is critical to building wealth. Each cent you spend on interest could be earning dividends for you. Many millennials owe huge debts for student loans, but paying off high-interest debts is crucial if you want to start saving. Typical credit card debt often takes decades to get under control.
You should save for what you want to buy, live below your means, rent a modest apartment and drive a modest car when you’re young. During this time of your life, you can concentrate on building your resources. Resist the impulse to buy luxury items and name brands. It’s also beneficial to cultivate more responsible friends instead of hanging with big spenders and risk-takers.
According to daveramsey.com, it’s critical to plan your lifestyle and investment strategy at each stage of your life. Everything you do when young will have lasting consequences on your income, opportunities, job prospects and lifestyle.
Debts are one of the most insidious risks for young people who really don’t really need a new house, fancy car, vacations to Cancun and every new electronic gadget. Raise your standard of living gradually–while building wealth through investments–and each step will be sustainable.
Living Below Your Means While Able to Enjoy Simpler Amusements
When you’re young and energetic, you can enjoy sports, hiking, mountain climbing, hunting, fishing and water sports. Enjoying simple outdoor activities will not only save money but also improve your health and appearance. Borrow books and videos from the local library instead of spending hundreds or thousands of dollars each year on entertainment expenses. The best practices for freeing money to invest include:
- Reducing everyday living expenses
- Creating a budget and sticking to it
- Paying down debt
- Investing windfalls to increase their yield
- Developing a plan with your spouse so that both of you are working toward the same goals
- Eliminating duplicate services and unnecessary entertainment expenses
- Buying food strategically such as using coupons, stocking up on sale items, buying in bulk, cooking from scratch, etc.
Your Retirement Depends on Investing
Investing is ubiquitous in today’s economy. Banks invest, and your IRA and 401(k) make investments on your behalf unless you choose a self-directed account. The Social Security Trust Fund is an investment program that generates money to pay entitlements for potentially every American.
There are investments to suit every person. It’s important to invest in what you know, but that doesn’t mean you can’t learn about new investments. When you’re young, it’s the optimal time to learn, take risks and begin building wealth.