This week we came across an article from CNBC titled “How to become a millionaire?” CNBC touched on a very important topic that not many 20-40 year olds focus on; putting your savings to work for you. We wanted to speak to our younger readers about just how lucrative saving towards retirement can be.
Treece Investments ran an ad several years ago showing how much, through compounding interest, an individual who saved $20 per week for 50 years at an annual rate of return of 10% would have. That figure came out to be $1.3 million. Retiring as a millionaire is not as difficult as one might think, however it requires knowledge and discipline.
The CNBC article focused on a survey asking individuals with a net worth of over $5 million in investible assets about “…the actions that have most contributed to their financial success?” The number one answer was “saving early and regularly,” followed by “making smart investment choices.” The third response, “earning a lot of money,” did not score as high as expected.
The problem is that investing isn’t “sexy” to young people. In a society centered so heavily on personal appearance and trends, most young people would rather have a new “thing” than they would excess cash to invest. We encourage all young people to make saving a priority, and to reward yourself with “things” only after you have made your necessary savings. Aside from mental discipline, there are many actions investors can take to ensure a successful and happy retirement.
While we encourage all of those individuals with a 401(k) or 403(b) plan available to utilize them, it is unlikely that that one account will be enough to retire on. Personal investment accounts, joint investment accounts, trusts, etc. are a great way to save even more outside of employer sponsored plans.
Understanding and assessing risk is another key to investing. I recently had a discussion with a friend about personal finances and informed him that I do not maintain a savings account. When asked why, I explained that my money is not working as hard for me at the bank. “Sure, I am ensured by the FDIC up to $250,000, but I am only earning 1% on my money, and I believe that I can find opportunities to earn more than 1% in the markets. Furthermore, mutual funds are highly liquid in the event that I need cash, and have SIPC insurance.” It is important to understand, while mutual funds can be volatile, the risk involved is not nearly as great as the risk associated with derivatives or other investment vehicles.
We also encourage young people to look in to Automatic Investment Plans, or AIPs. AIPs allow for your investment institution to take an agreed upon dollar allotment from your bank account at regularly scheduled intervals (weekly, monthly, quarterly or annually) and place those funds in your investment account. AIPs are a great tool for young people who are looking to make saving a common and scheduled part of their lives.
By starting early, every young investor can certainly retire as a millionaire, but only with discipline, knowledge, and a passion. Much like changing dietary habits or going to the gym, beginning to save money is much more difficult than continuing to save.
Saving now could mean a healthy retirement for you down the road, and you owe that much to yourself.