Monday, April 21, 2014

A Totally Do-Able Investment Plan For Anybody Ever


Read this if: 

1) You want to invest but don’t because [ insert any reason here ]. 

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One of the best things you can do for yourself, especially when you are young, is to invest. Let time and the magic of compounding take care of things. Read on for an example and some motivational talk. 

Setting Up 

There are obviously a lot of factors that go into how much you earn from investment, but this plan is focuses on the factors for people who have money to invest in index funds (low cost, relatively less risk, relatively high rates of growth). If you don’t know what those are, you should read my posts here and here.  I highly encourage investing with Vanguard or T. Rowe Price (the latter has lower minimums). 

Here’s The Plan 

If someone stole $2 from your bank account every week, would you notice? Probably not. (I know I wouldn’t, because I so rarely look at my transactions.) 

Well, since you wouldn’t miss that money anyway (it amounts to about $100), let’s just take it and invest it in a low cost index fund. Let’s also say that after all is said and done (taking into account taxes and fees), the growth rate averages out to about 5% per year. (This is a conservative estimate, it really could be much higher.) 

This is where compounding comes in: multiply your $100 by 1.05 each year (that will add the 5% growth to the amount at the beginning of each year). 

After a year, you’ll have $105. 
After two years, you’ll have $110.25. 
After five years, you’ll have $127.63. 

Hmm. At this rate, in 40 years, you’ll have around $700. It’s surprising and a little hard to believe, but math doesn’t lie. 

Just for kicks, it’ll be $1147 in 50 years. 

Are you seeing this?!

That $100 is just sitting somewhere, and in 50 years, it could turn into over $1000, without any more work on your part. Just think what could happen if you invest more, or invest through a retirement account like a Roth IRA where you don’t pay taxes on your earnings. It could be a lot, lot more. 

Caveats
  • Some funds won’t let you start with $100, so you’ll probably have to invest with at least $500 to start out. I wanted to use $100 as an example because I think it’s a number that I can easily picture in my head, and I can easily picture the $1000 that it could turn into. 
  • Time is the key here - you have to commit to leaving your investment there for a long period of time, so this won’t work if you want a lot of money in the short term. 
  • This example uses "average rate of return" to calculate earnings each year - realistically, the rate of return could be -30% on year and +30% the next, which is a lot harder to calculate. 
Bottom Line

This is my vanilla, plain-Jane investment strategy for everyone who doesn’t want to think too much about it. Find an index fund (based on how much money you have to invest), put your money in there, and don’t do anything else. Just leave it there until you’re old. 

People always think that to do stuff for the long-term, they can’t do what they want in the present - I hope this shows that you can definitely maintain your current lifestyle (unless you’re, like, already in debt - in that case, pay those off first) and still do a lot for your future self. 

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 Any questions? Any flaws in my perfect plan? Let me know in the comments. 

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As always, contact me with questions or suggestions! 

Comment on the post or email me at moneymattersjoan@gmail.com!
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Photo Credit: Joan Zhang

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