When I was in high school I had a math teacher that lit a spark inside of me. He understood the power of compound interest and realized the opportunity he had with a class full of 17 and 18 year olds. He knew if we started early and invested just a small amount every single one of us could become millionaires.
We were shown countless examples of how a sum as small as $50 or $100 could turn into hundreds of thousands or even millions of dollars by the time that we were of retirement age.
That summer after I graduated I worked my tail off and made about $4,000. This was in 2002 so investing your money online through a company like Vanguard was pretty much unheard of. So I went to my local investment adviser and he again showed me the power of compound interest just like my math teacher did earlier that year. He showed me a mutual fund that had averaged around 12% for the last 70 or 80 years. He suggested that I invest my money in that fund. So I did.
I invested $1,000 into a Roth IRA. The next suggestion he made was to continue to invest in that fund regularly. He said that even if I could only afford to put $10 a month into my Roth IRA that would help significantly in the long run through what he called dollar-cost averaging. I was starting college that fall and really wanted to hang on to the rest of that cash that I had to pay for tuition and books, etc. So I decided to only invest the $1,000 for the time being.
I should have listened to my investment adviser.
Dollar-cost averaging is a strategy where you invest a fixed amount of money regularly. The idea is that when share prices are high the investor purchases fewer shares and when the share price is low the investor is able to purchase more shares. It is a great long-term strategy.
So maybe you are just starting out as I was when I first started saving for retirement. Things are tight financially speaking but at the end of the month you’ve got an extra $100 to play with. You have had it pounded in your head for years that you need to save for retirement. But where do you start? You only have $100. Is that even worth investing? Will it make a difference? It’s such a small amount that you think that maybe you would be better off to just spend it and have some fun.
As my investment adviser had told me, there is no amount that is too small. Time is your friend and also your biggest enemy. The key is to get started now!
If you only had $100 a month to invest, lets look at how much that could turn into in 30 years.
$100/month – 30 years – 8% return = $141,761
And investing for another 5 years gets you too…
$100/month – 35 years – 8% return = $215,635
Your investment grows by over $73,000 in that last 5 years! This is a great illustration of how time is such a major factor.
So where do I invest this money? I will run down a list of options. There are hundreds of ways to invest money. I am not looking to show you every way imaginable but rather a handful of very simple ways to invest your $100 ranked from worst to first.
7. Stuff it under your mattress.
You are scared to death of the this thing they call “The Market”. It could crash at any time. Your $100 could turn into $90 or $70 or even be cut in half in just a few days! Calm down, do some research and quit listening to the naysayers. It is wise to keep a small amount of physical cash on hand in case of an emergency but putting your entire life savings under you mattress because you are so afraid of losing money is insanity.
You are basically guaranteed to never lose any capital. I can’t really think of any other pros besides this.
Inflation will slowly eat away at your money. In America the cost of our goods and services rise by approximately 3% per year on average. This means that what you could buy for $1 last year is going to cost you $1.03 this year on average. In other words the world is moving forward and your money is collecting dust in the past.
That $100 that you put under your mattress did not grow in the past year and therefore you essentially lost money by not investing it.
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6. Buy some metal.
What?!?! Not just any metal, but gold and silver. In my opinion this strategy is pretty much a tie with stuffing it under your mattress.
The only usefulness I see for gold and silver is as a hedge against the volatility of government. This is not an investment strategy. There are the people out there that always claim the world is coming to an end and that we need to prepare. They claim that your paper money will be worthless when the economy collapses.
My opinion is that if the world is going to end then let it. We are all going to die eventually. I am not going to base my retirement strategy on something that has never happened in the history of the United States. Moving on….
I’m not sure there are any.
You are not invested in a business. Businesses are in the business of making money. Businesses want growth. They strive for growth. They invest in their people and their ultimate goal is to make more profits. Gold is not a business. Your 3 ounces of gold is not going to grow into 3.25 ounces of gold by next year.
5. Certificates of Deposit (CD’s)
This is the first item on our list that actually grows and is invested in something!
Buying a CD is basically loaning your money to the bank. The bank agrees to pay you a fixed interest rate for a predetermined amount of time in exchange for you letting them borrow your money.
Your money and your interest rate are guaranteed! We all love a sure thing. CD’s are insured by the FDIC at banks or the NCUA at credit unions. You can’t lose money on a CD.
not great poor. As of the writing of this article CD rates are somewhere around .75% to 1.00%. That is less than inflation. Another detractor from CD’s is that your money is locked up. You cannot access your money for the predetermined time period without paying penalties and fees. There are very few scenarios where I would recommend utilizing CD’s.
4. Money Market Account
A money market account has many similarities to a basic savings account. It is liquid like a savings account, meaning that the money is very accessible as opposed to a CD that might charge fees and penalties for accessing your money prior to maturity. A money market account generally has limits on withdrawals like a savings account but typically offers a higher interest rate than a savings account as the money is invested in short-term liquid securities.
Liquidity. Very safe investment. Possibly a good place for short-term savings such as a down payment for a house, saving for a car or other big purchases.
Low returns. Generally require higher minimum account balances.
3. Individual Brokerage Account
TD Ameritrade, Fidelity, Charles Schwab, etc. You go online, open an account and start investing in stocks, bonds, mutual funds, etc.
You can literally invest in just about anything your heart desires. You can even invest in currencies (don’t do this) and options (don’t do this either). Returns can be exceptional.
There are too many to mention. The biggest downside to investing in your own brokerage account is that generally there are no tax advantages like a couple other investing tools that I am about to show you. Also, the risk is enormous. Huge sums of money are made and lost everyday in the stock market. When you are buying an individual stock you are buying part of a company. If that company goes broke, you basically lose all of the money that you had invested in that company.
2. Roth IRA
The Roth IRA is an awesome investment vehicle. This is the first tool on my list that I wholeheartedly recommend for retirement investing. A Roth IRA is like an individual brokerage account in that you can invest in just about any company out there. The difference is the tax benefits.
I recommend investing in low-cost index funds within your Roth IRA. The money invested in a Roth IRA is after-tax money. Meaning that the government has already taken their cut of the money from your paycheck. There are a couple awesome benefits to a Roth IRA. First and foremost, the money grows completely tax-free. So if you invest $100/month in a Roth IRA and it grows at 8% for 30 years as I illustrated earlier, you now have about $141,000 tax-free. So when you are retired and withdrawal that money you are not taxed on it! The second great benefit of a Roth IRA is that you can access the money that you invested anytime you want without penalty. Now if you invest $100 and the next month it is worth $110 you can only withdrawal $100 without being penalized.
For the average person I think one of the “pros” of the Roth IRA can also be a “con”. That is the withdrawal without penalty piece. This money is meant for your retirement, it is not meant to be used for purchasing a brand new car on a whim. You need to be disciplined.
Another downside of the Roth IRA is that you could be in a completely different tax bracket when you retire. If you are currently in a 25% tax bracket and are only in a 15% tax bracket when you retire then it actually worked against you. This is something to keep in mind when deciding what vehicle to use for retirement investing.
1. Company matched 401k
This is the holy grail of retirement investing. If you have this as an option you absolutely must take advantage of it. A lot of companies will match your 401k contributions up to a certain percentage of your salary.
The number one benefit of a 401k is the company match. If your company does a dollar for dollar match, then your $100 automatically turns into $200 as soon as you invest it. That is an automatic 100% return immediately! Even if your company only does a 50% match your money still increased by 50% immediately. If you invest $100 into your company 401k with a 100% match how much will that turn into in 30 years?
$200/month – 30 years – 8% return = $283,522
How awesome is that? Over a quarter million dollars just by investing $100 per month. One of the other major benefits of a 401k is the tax benefit. This money is invested in your 401k pretax. That means that your money goes in there before the government has a chance to get their hands on it. That is huge! All of the other strategies that I have listed above are after tax dollars. Pre-tax vs. after-tax can mean thousands of dollars in tax savings over your career.
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It is much more difficult to get to the money in your 401k before what the government deems “retirement age” aka 59 1/2 years old. You can access this money before 59 1/2 but if not done properly there can be as much as a 10% penalty for an early withdrawal. Also, since the money was not taxed going in, the government is going to tax it coming out based on your tax bracket when you withdrawal the money. Again, like the Roth IRA, this is something to consider when deciding which investment vehicle to use.
When I retire I plan on being in a lower tax bracket since I won’t need near as much money. I won’t have a mortgage. I won’t be investing for retirement anymore and I won’t need to spend near as much money on gas since I won’t be driving back and forth to work everyday. For these reasons it makes sense for me to invest as much money as I can pre-tax into my company matched 401k.
Just a Snapshot
Like I said before, there are hundreds of ways to invest. My two top suggestions for anyone starting out investing for retirement is the 401k or the Roth IRA. Keep it simple when you are getting started and you will build a great foundation for a comfortable retirement.
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