By: Ben Dunbar
1. “I’ll save when I’m making more money”
2. “I don’t have enough money to start investing”
3. “What the heck is a Roth IRA?”
4. “I have no idea what I’m contributing to my 401k, or how its invested”
5. “When I pay off all my loans, I’ll start”
When we were kids, many of us saw the route of getting married, owning a home, and having kids EASILY by 25-30 years old. For most of us, this hasn’t happened. There may be some odds stacked against us, but there are also many in our favor. We are young. We have time. We are changing the work force. We have more information available at our disposal than any other generation, and can access it the quickest. Although there is some great information out there, many young people are making basic mistakes.
“I’ll start saving when I”m making more money.”
I remember my first year out of college having that conversation with myself. If I open up a 0% Credit Card, I will easily pay it off in a year. Be careful. It is crucial to start saving right in the beginning (even if it is a little bit) because as we get older, we tend to increase spending on an improving lifestyle. Contributing at least 5% to a 401k is great start, but also make sure you are building up your liquid (you can access at any time) money and not just retirement money. Start small and continue to increase contributions as income rises.
“I don’t have enough money to start investing”
Generally speaking, if Credit Cards are paid off, we have 3 months of expenses in our bank account, and we are saving, we can start. There are investment options out there for as little as $50 a month, just as there is for $1,000,000. Every year of compounding interest has a significant impact to investments (see next section).
“Roth IRA? Heard of it, no idea what it is”
Ideally, one day we will not qualify for a Roth IRA because we are making too much money. Seek advice from a financial professional or accountant to find out if this a problem for you. Why contribute to a Roth IRA? ANY MONEY INVESTED IN A ROTH IRA GROWS TAX FREE. Not paying taxes is a great thing. The caveat is that this is a retirement account, and accessing money before 59.5 years old can incur a penalty.
The S&P 500 (roughly the 500 largest public companies in USA) has returned on average of 10% a year since 1928 *1. Putting $200 a month over the past 40 years(with that average return) would have resulted in $1,276,00 TAX FREE. If that same investor waited 5 years to start, $766,000 would have been the result. 5 Years of waiting could cause a $500,000 difference. *2
“I have no idea what I’m contributing to my 401k, or how it is invested”
Do we have a pension at work, or do we expect to get much from Social Security? To be safe, let’s not plan on it. We need to save for our own retirement and cannot depend on the government, or our company to provide retirement for us. Many companies offer a match in a 401k. Take advantage of that and more. Make sure you know what you are invested in and it is aligned for you and your goals.
“When I pay off all my loans, I’ll start”
Not all loans are treated equal. Some new car loans are 0%, Student loans vary from 3-7%, and credit card interest rates are up to 30%. The lower the interest rate, the more likely chance we can grow our money at a higher rate than the loan. Oftentimes it can make sense to simultaneously pay off a loan, while saving and investing. As we saw in earlier example, the longer we wait, the less time we have for our money to compound.
Don’t be afraid to start investing or at least have the conversation. A little bit of saving/investing each month can go a lot a further than we think. There will always be an excuse to hold back from starting. This can be a potential purchase, a job uncertainty to not start or lack of knowledge. Whether it is with an advisor your know, friend of a friend or even online start somewhere. Compounding interest could be the 8th wonder of the world, and fortunately, we have time to take advantage of it.
*2 This example assumes investing in S&P 500 directly and does not include any potential fees you may incur. Also note, performance can vary and past performance is not indicate of future results
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Investment advice offered through Gerber Kawasaki Inc, a registered investment
advisor and separate entity from LPL Financial.
The opinions voiced in this material are for general information only and are not
intended to provide specific advice or recommendations for any individual. To
determine which course of action may be appropriate for you, consult your
financial advisor. No strategy assures success or protects against loss.
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