For those of you who are self employed I can not say this enough. Yes, you need capital. The second that you need to start investing to an IRA immediately when you have any kind of steady flow of income.
For those of you that are employed I can't stress enough that you need to immediately enter your employer sponsor retirement plan at least up to the minimum they'll match. I don't care if your employer doesn't match for a year. I hear it over and over that people wait to opt into their employer sponsored retirement plan. For the sake of this post I'm going to refer to the employer sponsor retirement plan as a 401k which for most of you is. Do really stress this I tell people that is free money, take it. Now personally I don't think it's free money. When I calculate cost as an employer I consider that part of the cost when hiring someone.
Quite honestly it's a bonehead mood not to meet the minimum to get the match. It's part of your pay in my opinion. Why not take all your pay? I once had a friend tell me it's not necessarily free because the markets are volatile and you could lose it. I understand his thinking, but he's oh so wrong. First of all if I buy 5 shares at $10 a share. It goes down to $5/share, yes, the most important thing value has gone down. I haven't lost my 5 shares though. Now I'll touch on this a little bit more later why that really makes a difference. I've also heard that I can't afford. Now there might be some people that can't afford it. If you have a job you can and if you absolutely need to get to the money you can. Don't unless it's a necessity and I hear people tapping into their 401k for a down payment on a house which is a huge mistake. Just lost out on that tax advantage, growth, and the power of annuity. 4-5% isn't a killer. Over 17.8% of my income goes straight to my retirement. Trust me I don't make much money, but I love my job.
If your employer sponsors 50% up to like 4% of your contribution after a year of employment. Put in at minimum that 4%. Don't leave that 2% on the table. Whether you don't plan to even vest. First of don't take that chance of leaving it on the table and I'll tell you why you need to invest and invest early.
The power of annuity is your best friend. Annuity is why investing early makes the difference it does. There's an old saying that if you put away just 1¢ just one penny and it doubles everyday you will have $10,737,418.24 in 30 days. Now that is making 100% on your money put it puts a big principal point to mind. The money we're talking about making is 6-10%. Yes, there might be years you make 18% and you might lose 15%. In the end you should average around that 8%. Back to that 10 million number. Once that principal gets large and you gain 8% it's higher when the principal amount is higher. It's really hard to drive that home.
What about those losses though? Back to why that question about if you lose it it's not really free money. There is one concept that is hard to understand. I'm an example person.We all hear buy low sell high. When our investment goes down and especially ones we are constantly contributing to like your 401k you're more with the same amount of money. Lets get to the numbers.
Lets deposit $50 per deposit and here is the change per deposit comparison for a steady growth between something that steadily grows and something that goes down and starts at what it began at.
Up and Down Steady growth
Shares Cost/share Shares Cost/share
10 $5 10 5
13 $3.846 9.5 5.263
15 $3.333 9 5.555
17 $2.941 8.5 5.882
20 $2.5 8 6.25
20 $2.5 7.5 6.666
17 $2.941 7 7.142
15 $3.33 6.5 7.692
13 $3.846 6 8.333
10 $5 5.5 9.09
The value of up and down is at $750 and the value at steady is $704.54. On a graph the up and down would be like smile the start and the end would be the same point with a dip. Now the steady growth is just a straight diagonal.
Still not convinced? Real live exact numbers. Lets say hypothetically we make 8% every year. Person A invests at the age of 20 for 10 years and stops. B doesn't start to invests till 30. Each investor invests $5,000 a year. Difference being investor A invests from 20-29 putting in a total of $50,000 and then not contributing anything anymore and B won't start till 30.
Age A B
| 20 | 5,000.00 | |||
| 21 | 10,800.00 | |||
| 22 | 17,064.00 | |||
| 23 | 23,829.12 | |||
| 24 | 31,135.45 | |||
| 25 | 39,026.29 | |||
| 26 | 47,548.39 | |||
| 27 | 56,752.26 | |||
| 28 | 66,692.44 | |||
| 29 | 77,427.84 | |||
| 30 | 83,622.06 | 5,000.00 | ||
| 31 | 90,311.83 | 10,800.00 | ||
| 32 | 97,536.77 | 17,064.00 | ||
| 33 | 105,339.72 | 23,829.12 | ||
| 34 | 113,766.89 | 31,135.45 | ||
| 35 | 122,868.24 | 39,026.29 | ||
| 36 | 132,697.70 | 47,548.39 | ||
| 37 | 143,313.52 | 56,752.26 | ||
| 38 | 154,778.60 | 66,692.44 | ||
| 39 | 167,160.89 | 77,427.84 | ||
| 40 | 180,533.76 | 89,022.06 | ||
| 41 | 194,976.46 | 101,543.83 | ||
| 42 | 210,574.58 | 115,067.33 | ||
| 43 | 227,420.54 | 129,672.72 | ||
| 44 | 245,614.19 | 145,446.54 | ||
| 45 | 265,263.32 | 162,482.26 | ||
| 46 | 286,484.39 | 180,880.84 | ||
| 47 | 309,403.14 | 200,751.31 | ||
| 48 | 334,155.39 | 222,211.41 | ||
| 49 | 360,887.82 | 245,388.33 | ||
| 50 | 389,758.85 | 270,419.39 | ||
| 51 | 420,939.56 | 297,452.94 | ||
| 52 | 454,614.72 | 326,649.18 | ||
| 53 | 490,983.90 | 358,181.11 | ||
| 54 | 530,262.61 | 392,235.60 | ||
| 55 | 572,683.62 | 429,014.45 | ||
| 56 | 618,498.31 | 468,735.61 | ||
| 57 | 667,978.17 | 511,634.46 | ||
| 58 | 721,416.43 | 557,965.21 | ||
| 59 | 779,129.74 | 608,002.43 | ||
| 60 | 841,460.12 | 662,042.62 | ||
| 61 | 908,776.93 | 720,406.03 | ||
| 62 | 981,479.09 | 783,438.52 | ||
| 63 | 1,059,997.41 | 851,513.60 | ||
| 64 | 1,144,797.21 | 925,034.69 | ||
| 65 | 1,236,380.98 | 1,004,437.46 |
So what? A put in $50,000 and is still has $231,943.52 more then B. B has put in $180,000. Really think about it, it's a $361,943.52 difference. So when will B catch A? Honestly never with these variables. This is why investing early and keeping it in there is important. It doesn't even matter if you understand the power of annuity. Just put your money away. A dollar today doesn't buy the same thing tomorrow. Your money decreases in value 3% on average every year. If you don't make 3% you lost money. Look at gas. I've heard back in the day how it was 10¢ a gallon. I think here today ethanol is like $3.55/gallon. Everyone can see pop and candy prices go up. I remember getting a soda out of the vending machine for 75¢. I remember the change to $1 and now it's at least $1.25 they might be up to $1.75 in some places I believe. I remember when candy was only a 50¢. Might get something for $1.
The one last thing that I wanted to touch on again is dividends which is another power of annuity. When dividends are paid out and then reinvested you just gained a larger part of the pot. It adds to that principal amount. The larger the principal grows when there is growth and you'll also receive a higher percentage of dividends next time. It increases like the principal amount.The power of annuity.
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