Millennials have recently become the biggest part of the workforce, and like any adult growing old, they need to start considering how they’re going to support themselves in retirement. The answer is in getting started with investing as soon as possible. Sure, millenials have been nicknamed the YOLO generation, but that won’t last forever. Living in the moment is important, yet you can’t count on your parents, and probably won’t be able to count on the state either 35 years from now when you retire. So how do you get started?
Take Advantage of Compounding
Compounding is a simple enough concept to understand. For every return on your investments, if your reinvest that money, it will start growing on top of the original amount you invested. Let’s look at this in action.
Millennial A invests $10,000 in a brokerage account for five years with a return of 7.5% per year. At the end of those five years they would have just over $14,350. Without compounding they would only have $13,750. The difference may not seem like much, but with compound interest, the longer you invest, the more money you’re going to make. Add in regular deposits and the difference between compounded returns and non compounded becomes even wider.
Get Started Early
As a millenial, one thing you have on your side is time. Time to invest and grow your money. That said, your first priority should be getting rid of any debt you might have with high interest. That includes student loans, credit card debt, and any other personal loans. Mortgages are usually pretty cheap, and your money will grow faster if it is invested rather than used to pay off your mortgage.
Once that is done, you need to figure out how much you will need for retirement. And based on that, how much you need to save and invest each month to make it happen.
The key is to give yourself as much time as possible. Someone who starts at age 20 has a much bigger advantage over someone age 40. Another advantage of starting earlier is that you can start out with a smaller monthly contribution, and keep adding to your investment account every month, compared to someone who starts half way through their working lives.
You can start with as little as $500. There are many brokers that will allow you to contribute small amounts to your account every month. Instead of coming up with a big lump sum, regular deposits also have the advantage of allowing you to dollar cost average your investments, instead of trying to time the market.
What Should You Invest In?
For many millennials who want to start investing, the main obstacle they have to overcome is deciding what to invest in. Since this is about investing for your retirement, you should opt for a low-risk strategy. The returns in the short-term might be a tad disappointing, but over time these small returns will really add up.
Spread your risk by avoiding single shares and opting for index funds instead. Robo advisors have become increasingly popular in recent years. If you do invest in single shares, pick dividend paying ones, and solid companies that have been around for years. Not that new cool startup that may not exist ten years from now. This will reduce the risk of big losses during tough economic times.
Get Your Deposits Right
You may have read all those stories of people having millions of dollars in retirement because of compounding. But they didn’t do that through putting $10,000 in an investment account and forgetting about it. They consciously added to it month after month. This may only be another $5,000 per year, but it can make a big difference over time.
Let’s take someone getting a 7.5% return per year with an initial $10,000 investment. They invest for 40 years without any additional deposits. At the end of those 40 years they will have $180,000.
But what if someone adds $1,000 every month over those 40 years? If we run the same calculations again the second person would come out with over $3 million. Their total deposits sum up $490,000. Adding to that initial investment makes a big difference, all thanks to compound interest.
You should seek to increase your deposits as you reach your peak earning years. And if you do start investing later in life you’ll need to start out with bigger amounts, if you hope to reach those seven-figure numbers.
Start Early and Reap the Rewards
It’s never been easier to start investing with a small amount of money. Millennials have time on their side and the quicker they get started the more money they can expect to have for retirement. Small, regular amounts contributed to an investment pot can give you a solid nest egg upon retirement.
Focus on low-risk, low fee investments that you can contribute to regularly. Reinvest dividends immediately and avoid withdrawing anything.
Do this and your retirement might come earlier than you think!
Have you already started an investment fund?