If you invest as little as $2,000 a year in a tax deferred account for six (6) years, you will become rich! When you are twenty-two (22) years old, you are not thinking about retirement, but you should. Time is the most important part in investing, it balances stock market volatility, mistakes and you cannot make up time! What do you need to do?
I feel a little bit like the guy in The Graduate when he pulls aside Benjamin Braddock at his party and he says he has one word of advice. In the movie, it was plastics! When talking about money and investing, there are two words, investment growth!. Investment Growth is an integral part of investing. Although investing include investments that earn interest, ordinary income and capital gains, this is how your investments grow over time. Investments generally appreciate over time and add earnings to the original investment. Money or Your Life chronicles how I invested early which allowed me to achieve financial freedom.
The most important step to wealth is starting early. How early do you need to start? If you could open an IRA at birth, do it! Since you do not work as soon as you are born, everything is dependent on your parents. It would be great if you could pick rich parents who would start an IRA for you. Since this is unlikely, we go straight to Plan B. Start investing as soon as you can when you start working. Many teenagers start working at sixteen (16) years old, but will you invest $2,000 for retirement? It is more likely when you have your first professional job following college or post secondary training.
If you invest early, you have the advantage of more years to make the money grow. This is the power of compound interest. The real power is the number of years for your investment to grow. If you start early, you will have close to forty (40) years for your investments to grow. The amount of growth can vary, but over the very long term the stock market averaged 8-10%. Will you earn more or less than that doesn’t matter, if you invest early enough. The interest or appreciation is the amount of growth per year.
Investing regularly is important. Investing on a regular basis is called dollar cost averaging. This is an investment strategy where you purchase shares of stock or mutual funds using a set amount of money on a regular basis periodically ($100 monthly). This way you buy more shares when prices are low and fewer shares when prices increase. In the long run, you lowered the average cost per share of the investment. The growth of your investment is the difference between your cost and the value of your investment. Adding to your investments on a regular basis, weekly or monthly will build wealth.
Reinvest your dividends and purchase more shares of stock or mutual fund. This will help your investment grow faster. Buying more shares expands your base adds to your investment over time. As the price increases, your investment will grow faster through your reinvestment of dividends. The more frequently you can add to your investment, the faster your investment grows. These strategies will increase your investment and help you reach your financial goals.
If you start early, you can invest as little as $2,000 per year for six (6) years at 12% interest, you can accumulate more than $1.1 million. This is the power of compound interest over time (40 years). Reduce the interest or change the term, your investment grows over time. Starting early helps grow your investment more than the interest rate. Investing early puts time on your side. Waiting to invest will significantly reduce the amount of growth. You can improve your investment returns by investing regularly and reinvesting dividends and capital gains. Investing in a tax deferred account allows you to invest all your money without paying taxes until you withdraw the funds. In most cases, you will be in a lower tax bracket when you withdraw your funds. What are you going to do? If you really want to become rich, you need to start investing early!
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