Are you between the ages of 20 to 30? Great. Pay attention. There is a very simple, damn near fool-proof way to retire a millionaire.
"What if I'm not between the ages of 20 and 30? Is it too late for me?" Absolutely not! You'll have to invest more but this is still 100% attainable if you're committed.
Most of the people that I talk to understand the importance of investing to:
1.) Beat inflation
2.) Grow your money and take advantage of compound interest
The part that many of us struggle with is the what and the how.
"What should I invest in? Stocks? Bonds? Real estate? Cryptocurrencies? Forex?" Next thing you know, we're overwhelmed with options, so we do nothing.
Here’s a quick data-based summary to help you determine what has the highest returns over the past 100+ years and the most historical data to back it.*
Even once we decide on, let's say, stock investing, there is the still the question of how? "How do I buy stocks? Do I call a financial advisor? A stockbroker?"
First, a quick synopsis of the key things you need to know in the simplest, most bare-bones form:
1.) Individual Stocks vs. Index Funds
2.) Asset Allocation
3.) Dollar Cost Averaging
Let’s assume you’re either 20, 25, 30, 35 or 40.
Let’s assume you invest $500 a month, every month, until you're 65. Not your tax return. Not your spare change when you "can afford it." Not your birthday money. $500 every single month. Feel free to throw in that other stuff, but we're using a steady baseline of $500/month consistently.
“$500 a month?! I can’t afford it.” Then you have a cash flow problem, my friend. Hit the subscribe button at the bottom of this post and I’ll send you my guide to increasing your cash flow where I detail the high-level steps that I use to maintain a 50%+ savings / investing rate every month.
Thanks to compound interest (aka the 8th wonder of the world) these are your expected returns (assuming 11% returns).
Invest $500/month until the age of 65.
Age 20 -> $6.5 million
Age 25 -> $3.8 million
Age 30 -> $2.2 million
Age 35 -> $1.3 million
Age 40 -> $760,000+ You didn't make the cut. You'd have to increase your contributions to about $700/month to hit $1 million.
What if you decided to stop contributing at age 40 to become a stay at home parent, or retire early, or do virtually anything else?
Age 20 - 40 -> $5.8 million
Age 25 - 40 -> $3.1 million
Age 30 - 40 -> $1.5 million
Age 35 - 40 -> $557,000+ You didn't make the cut. You'd have to increase your monthly contributions to about $1,000/month to hit $1 million.
Age 40 -> $0
What in you contribute a lump sum of $25,000 and then never add another dollar until you turn 65?
Age 20 -> $2.7 million
Age 25 -> $1.6 million
Age 30 -> $965,000+ You didn't quite make the cut. You'd have to increase your lump sum amount to about $28,000.
Age 35 -> $570,000+. You didn't make the cut. You'd have to increase your lump sum amount to about $45,000.
Age 40 -> $339,000+. You didn't make the cut. You'd have to increase your lump sum amount to about $75,000.
Now, we did we learn from doing this exercise?
1.) Time in the market > Amount of money placed into the market.
2.) Over time, your compound interest / growth actually makes up a greater percentage of your portfolio than your actual contributions. Growth accounts for 96% of the portfolio in the below example.
3.) Time is such a significant factor, that even doubling your contributions a decade later doesn't make up for the time lost in the market.
Now that we've decided to invest in index funds as soon as possible, to increase our time in the market, we can go three main routes:
1.) Use a stockbroker or advisor.
2.) Do-It-Yourself with a brokerage like Vanguard.
3.) Use a robo-advisor like Betterment or Wealthfront.
Why should you trust this advice?
Jarim agrees with this approach, as does Mr. Money Mustache, who retired in his early 30's with his wife and child as a multi-millionaire. He's notoriously frugal, and only spends about $40,000/year so if he's willing to pay fees when he can do it himself? The. product. is. really. fucking. good.
"Okay, I'm ready to set up a robo-advisor and start investing right now. How do I get started?" Investor Junkie has a handy how-to guide for how to get started using Betterment, complete with screenshots.
Are there other ways? Dozens. But this is the simplest, most historically guaranteed. If you want to fool around with other investment methods, do it *in addition to* index funds, preferably with no more than 5% of your overall portfolio.
Now, if you're beating yourself up about not starting sooner -- stop it right now. An ancient proverb says "The best time to plant a tree was 20 years ago. The second best time is today."
Disclaimer: The above link is an affiliate link. I do not receive any compensation from using this link, however, if you sign up using my link and fund an account, you'll get 90 days managed free (no fees) and I'll get 30 days.
P.S. If you want to 10x your savings, you can use remote work to move to sunny, tropical destinations with a much lower cost of living - download the guide, Work from Anywhere, to learn how to take your job on the road.
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