It took 4 hours before I had someone doubt the ability of Millennials to invest. It came from a Millennial, on Facebook (that now old-school, quintessentially Millennial social network) in public. Millennials don't have money for investing. We simply don't. Wages are depressed, loans are sky-high, cost of living is only increasing. I understand. We don't have money.
Follow me for a moment, however.
You can open a TradeKing discount broker account for $500. That's approximately 100 hours of work on a minimum wage job minus taxes ($7.50*100=$750. $750/.30=$250. $750-$250=$500.) I understand that's a lot of money when working a minimum wage job, but possible.
Now let's invest it in an index fund. An index fund tracks the movement of a major index such as the Dow Jones Industrial or the S&P 500. A standard S&P 500 index fund will average approximately 10% over the long haul (30+ years). Which is fortunate, because we are going to plop that $500 into the index fund and just simply leave it for 40 years, from age 25 to age 65.
Guess what? That $500 is now $22,630. Compound interest is a powerful weapon, at least over the long run.
Now let's add a small amount of cash a month. Let's say...$50. Suddenly, your amount at 65 years old is $315,000. The massive difference is due to the addition of extra principal at a mere $600 a year.
But I'm actually a greedy 25 year old. I decide to give up my coffee habit, which is costing me $4.25 a day (Starbucks, you are the worst thing to happen to wallet since adulthood). That's $128 a month. That little addition (a mere $4 a day) makes your final return $1,062,000. You can play around with these numbers all day long, with greater or lesser returns.
The point is that you don't need a lot of money. I suppose you do if you want to be richer than Buffett or you need a million dollars tomorrow to pay a very massive electric bill. But money has diminishing returns above a certain limit, so what is a normal person to do with more than a couple of millions?
Aha! say some. But inflation is eating into that number at all times. This is very true. The 10% figure stated above is actually a pre-inflation figure. Inflation is a measure of the growing devaluation of currency, and it averages about 2.0% a year. The post-tax, post-inflation figure is 8.5%. If you plug this rate of return into a good investment calculator, it will give you a rough equivalency of what your money will feel like in 2055, evaluated in today's dollars. So you will technically have $1,062,000, but it will feel like...$698,000 of today's dollars. That should be enough to keep you happy, healthy and fed for a long time into retirement. Even if you had to live on the interest every year, it would feel like $54,000.
So no matter how old and creaky we are in 2055, a mere $500 today and $178 a month from then on out should take care of retirement. The rest is all gravy. I could be wrong, of course. The global economic system could entirely disintegrate, or aliens could invade, or environmental collapse could destroy the entire known economic system. But this is incredibly unlikely.
What is far, far more likely is that the stock market will increase between 7.5 and 8.5% after inflation. And anyone putting $178 a month away will have a comfortable retirement. This isn't a get-rich-quick scheme or a risky investment strategy. This is probability and compound interest and simple math.
Follow me for a moment, however.
You can open a TradeKing discount broker account for $500. That's approximately 100 hours of work on a minimum wage job minus taxes ($7.50*100=$750. $750/.30=$250. $750-$250=$500.) I understand that's a lot of money when working a minimum wage job, but possible.
Now let's invest it in an index fund. An index fund tracks the movement of a major index such as the Dow Jones Industrial or the S&P 500. A standard S&P 500 index fund will average approximately 10% over the long haul (30+ years). Which is fortunate, because we are going to plop that $500 into the index fund and just simply leave it for 40 years, from age 25 to age 65.
Guess what? That $500 is now $22,630. Compound interest is a powerful weapon, at least over the long run.
Now let's add a small amount of cash a month. Let's say...$50. Suddenly, your amount at 65 years old is $315,000. The massive difference is due to the addition of extra principal at a mere $600 a year.
But I'm actually a greedy 25 year old. I decide to give up my coffee habit, which is costing me $4.25 a day (Starbucks, you are the worst thing to happen to wallet since adulthood). That's $128 a month. That little addition (a mere $4 a day) makes your final return $1,062,000. You can play around with these numbers all day long, with greater or lesser returns.
The point is that you don't need a lot of money. I suppose you do if you want to be richer than Buffett or you need a million dollars tomorrow to pay a very massive electric bill. But money has diminishing returns above a certain limit, so what is a normal person to do with more than a couple of millions?
Aha! say some. But inflation is eating into that number at all times. This is very true. The 10% figure stated above is actually a pre-inflation figure. Inflation is a measure of the growing devaluation of currency, and it averages about 2.0% a year. The post-tax, post-inflation figure is 8.5%. If you plug this rate of return into a good investment calculator, it will give you a rough equivalency of what your money will feel like in 2055, evaluated in today's dollars. So you will technically have $1,062,000, but it will feel like...$698,000 of today's dollars. That should be enough to keep you happy, healthy and fed for a long time into retirement. Even if you had to live on the interest every year, it would feel like $54,000.
So no matter how old and creaky we are in 2055, a mere $500 today and $178 a month from then on out should take care of retirement. The rest is all gravy. I could be wrong, of course. The global economic system could entirely disintegrate, or aliens could invade, or environmental collapse could destroy the entire known economic system. But this is incredibly unlikely.
What is far, far more likely is that the stock market will increase between 7.5 and 8.5% after inflation. And anyone putting $178 a month away will have a comfortable retirement. This isn't a get-rich-quick scheme or a risky investment strategy. This is probability and compound interest and simple math.
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