Hi, I'm Sam. I like to help people with money, web 2.0, and social justice awareness. I have a dream of using the social media space to help people in both little ways (wheelchair ramps down the road) and big ways (ending human trafficking). Here you can read, watch, and listen to my thoughts on all three.
Welcome to the new Humble Beginnings series of posts and/or videos about finance.
I was originally going to title this post “The Biggest Mistake Young People Make with Money,” but I thought that sounded too negative. Oh, and please note: “young people” includes myself, and can really include anyone with 20+ years before retirement.
So, let’s start this post off with a principle: money is never stagnant. It is always gaining or losing value, and it is always moving. The cost of living goes up every year for a variety of reasons - this is called inflation - so it will cost about $1.04 next year for you to buy something that costs $1.00 today. On the other hand, something that costs $1.00 next year costs about $0.97 now. It’s as if your favorite clothing store was having a sale on everything.
This doesn’t mean that every single year every item will gain value, but, over a long period of time, the general trend is that the economy gets better, so money gains value. At least in a stable country.
The second principle is that money earns money on money. This is that old concept of compound interest. $1.00 earns, say 3% interest, and becomes $1.03. $1.03 then earns interest. If you let a dollar sit and earn 3% for forty years and never add a penny, it will become $3.26. “Big deal,” you say. “That’s not even enough for a chai latte.”
Well, it is a big deal when you blow those numbers up. $10,000 earning 3% over 40 years becomes $32,620. And if you change the interest, or put more money over time, that number explodes.
The real trick, though, is to save and invest your money so that it will beat the rising cost of living. Once you do that, you’re golden.
The third principle is that more time = more money. If you invested $2,000 per year for ten years, say 30-40, and then never touched the money again, you’d have $89,617 at age 60 (at 6% interest). On the other hand, if you waited until you were forty and invested that same $2,000 every year until you were sixty, you’d have $77,985.
In the first case, you invested $20,000 and let time do the rest - 30 years. In the second, you invested $40,000 but had less time - 20 years. You made $69,617 over 30 years, but only $37,985 in 20 years!
The numbers get even more dramatic if you change the amounts invested or the interest rate.
The moral of the story is to start early. A 25-year old only needs to invest $6,461 per year at 6% to have $1 million at 65 - that’s $538 per month. A 45-year old would need to invest $27,184 per year - that’s $2,265 per month!
Okay, I realize that $538 per month might be a lot for a 25-year old to swing. But you get the idea. Anything is better than nothing.
Here’s a summary:
1. Money is never stagnant (it’s always moving, growing, or shrinking).
2. Money earns money on money (the power of compound interest).
3. More time = more money (exponentially so!).
So start early.
Need more information? Contact me.
Coming soon: practical tips, Bizarro investing, and more.
