What would you give today to have invested $10,000 dollars 5 or 10 years ago? The growth, through the magic of compounding interest can be astounding.
During the 20th century the stock market returned an average of 10.4% a year. Just $1,000 invested in 1900 would be worth over $19.8 million by the end of 1999. At 15% average return per year, it only takes 30 years to turn $15,000 to $1 million.
The magic of compounding interest
You are far better off putting away a chunk of money at 25 years old and making no additional contributions than you would be putting away money at 45 and continuing to make contributions.
The moral of the story, don’t wait. Putting money away NOW for your future reaps huge rewards. Plug your own situation into the compound interest calculator below.
Regardless of your age and where you may be on your road to financial freedom/retirement, I highly recommend you open a Roth IRA. Even if you already have a 401(k) or other investments, do it. You will think yourself in your later years.
Earnings inside of a Roth IRA grow tax free. That’s the beauty of the Roth. Traditional IRA’s can be good vehicles in certain situations, but the earnings are taxed.
I setup an IRA with TDAmeritrade when I was 18 and it was the best kick start to my investments. I have all my investment accounts with TDAmeritrade along with most of my trading accounts.
Already have an IRA?
If you already have an IRA account start one for your spouse, a child, a niece or nephew. I can’t tell you how many friends and family members of mine have said, “boy I’m glad you encouraged me to start an IRA years ago.”
They may not see the benefit today, but they sure will years down the road. In many cases it can be life changing.
Weekly or monthly contributions
It doesn’t really matter. What matters is that you’re making contributions on a regular basis. Setup up an automatic transfer from your checking account on a weekly basis, it doesn’t matter how much, $10 for starters. The goal is to get in the habit of contributing.
Once your cash account balance reaches $500 or $1000, buy more shares.
What Should I Buy?
You’ll notice I left this part until near the end. That’s because it really doesn’t matter that much. What matters more is that you are continually contributing on a regular basis.
I like the Vanguard Funds and ETFs. VUG is a great one. I also own mutual funds VGSTX and VWESX along with other ETFs like SDY, DVY, QQQ, & IWM.
If you are just opening an account, or have less than $25,000 in your IRA, I would encourage you to just stick with one, like VUG. You don’t want to have to buy multiple funds, stocks, or ETFs and have the transaction costs eat away at your dollars.
So do it now! Start a Roth IRA. I promise you will be glad you did.
You can open an account with as little as $3500 and contribute up to $5500 ($6500 if you’re over the age of 50). If you have the means, max it out each year.
There’s still time to contribute into 2016
You have until tax day of the following year to contribute. So for 2016, you have until April 18 of 2017 (tax day).
Do the math, $10,000 invested today at 11% (the historical stock market average) and left to grow for 20, 30, or even 40+ years, how big does it get? Now add in your contributions for each year, $1000 a year, $2500 a year, max it out at $5000 per year. You’ll be amazed!
In order to be a successful trader, there are larger pieces of the pie that need to be satisfied, namely financial security. The bigger your net worth grows, the smaller percentage of that pie your trading account makes up, thus the less emotional tie you will have to the dollars in your trading account.