Time
If you are in your 20s or 30s, you have the incredible power of compounding interest & gains in your favor, if you are disciplined enough to start saving and investing early. Don’t fall for the crap your peers tell themselves – “well when I just pay off the school loans, buy a luxury car, buy a house I can’t afford, then I will be able to saving for my kids’ college.”
The fact is, no matter how little you can afford to put towards retirement now in a 401(k)/IRA or similar tax-advantaged savings vehicle, because you have more time now than you ever will have ever again for compounding to occur, the money you originally put in will eventually be worth less than the interest, dividends, and gains that will compound over time.
Compounding is the simple financial miracle where you earn money on your money, then you earn more money on the money you earned. You end up earning money on earned money, what’s not to love!
Something I have tried to impress upon my kids is that 1) you will never get your 20s back, and 2) someone who invests say 100 dollars a month for 10 years in their 20s will end up with more money then someone who starts in their 30s and invests a 100 dollars a month until they retire. (Assuming the market performs in the future like it has for the last 100 years, which is not guaranteed )
Time in the market beats timing market
When I first started working after college, I distinctly remember only being able to afford to have $25 a paycheck go to my 401(k), but with every raise I increased that as much as possible until I was always at least maximizing my employer match. Now, at 52, more than half of my retirement investment funds are gains, not what I originally put in.
Again, if you are in your 20s or 30s, don’t make excuses, it doesn’t matter how little you can afford, start saving right now, every little bit adds to the compounding effect, and the fact that you are saving early makes up for not being able to save a lot right now in the long run. You future self will thank you.
A few things to keep in mind as you do invest:
- Always maximize your employer’s match
- It’s free money! Don’t leave it on the table
- Buy inexpensive, well diversified index funds. (see why)
- If you want to “set it and forget it” go with a target retirement date fund like Schwab/Vanguard/Fidelity Target 20XX
- Fees matter – because of compounding, over your lifetime, paying high fees versus low fee index fund can cost you 10 years of retirement income
- Consider the average mutual fund fee 0.50% with what I pay 0.04% – the ‘average’ is 12.5X more expensive for the same results! (see how)
My poor kids have had to sit through a Financial Basics presentation that this post is drawn from. Perhaps I will post on the other topics in the presentation in the future, but for now I will simply share the presentation with you here. As a reminder, I do have some strong opinions on this topic, but they are just my opinion, I am not providing you any specific advice, go do your research and make your own decisions.
https://docs.google.com/presentation/d/1HO29XXwjBghSfLnOygnMhlUfU21JWb4jUPZRSEfMbH0/edit?usp=sharing