You may remember learning about erosion in school, how a small trickle of water, over time, can wear away rocks and soil and transform into a raging river.
That image always enters my mind when I talk with young investors about how to make their money work for them early in their careers. Coming into their first jobs out of college, they probably aren’t making much income, and that’s while they’re considering student loans, saving for a first down payment on a home, and the other expenses that come from starting life on their own. Many of them feel that there just isn’t enough left over to start funding an investment account in a meaningful way.
That’s where the small trickle comes in. The biggest tool that a young person has between now and retirement is time. Even if we can begin by putting just $25 per paycheck toward retirement, like moving water, compound interest is a powerful force that over time can turn a small nest egg into something incredible.
Let’s look at an investment calculator to see this in action for ourselves. If someone who graduates college and enters their first job at 21 invests just $25 per week and earns a 10% return annually, they could hit 67 years old with more than $1.1 million in retirement.
(Note: that return can’t be guaranteed; it is just the approximate 30-year historic return of the S&P 500. Past performance is no guarantee of future results. For illustrative purposes only.)
Here’s a chart illustrating just how amazing that growth is.
And that’s without ever upping their contribution. Now imagine what it could become when you add an employer match, pay raises, promotions — you can see how that slow trickle over time can work to transform your financial future.
One thing to consider: Compound interest works the other direction, as well. Debt accumulation can squeeze your margin for investing, so it’s important that, on top of contributing to retirement, you’re putting as much as possible toward paying off student loans, paying off credit cards each month, and building good credit in order to get the best rates on mortgages and auto loans.
So are you ready to start your investment trickle? Get in touch, and let’s look at where you can start investing now to potentially grow it into a raging retirement river.
Article by Kyrk Davis, Wealth Advisor at Family Financial Partners — a financial services firm in Lexington, Kentucky.
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