Today’s guest post is by Stefan over at The Millennial Budget. Stefan recently graduated from college with his MBA and is sharing his journey towards financial freedom. If you are interested in investing and personal finance make sure to check out his blog!
Whenever I find myself speaking to fellow millennials about investing the first words that come out their mouth is that it is gambling. While gambling and investing both involve risk, choice and to some degree luck, gambling is more about the short term gain/loss while investing is about the longer term.
Investing in the stock market over a long period of time certainly takes away a lot of the risk gambling has by allowing investors to diversify their funds and more importantly, take advantage of compounding.
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Ben recently published an article on my site which discussed ‘Why Millennials Have the Most to Gain from Dividend Growth Investing.’ The key point from the article was time. Millennials are in their early 30’s or younger which give them a long investment horizon to take advantage of compounding.
Is Starting Young Really that Important?
I was privileged enough to take a personal finance course during college. This course exposed me to foreign concepts such as an emergency fund, the rule of 72, the magic of compound interest and much more.
However, there was one moment on the first day of class that forever changed my life. My teacher went to the front of the class and brought up a compounding calculator on the screen. He asked the class to give him two ages to begin investing at. We ended up agreeing on 25 and 30. After giving this information he told us that we will invest the same amount at the same rate of return up until we retire at the age of 65. Here are the results:
Example 1: At the age of 30, Joe begins investing towards retirement. Every year, Joe will contribute $10,000 to the S&P 500 Index Fund with expectations of an 8% return. Joe plans on retiring at the age of 65.
Based on the information given, Joe will accumulate a nest egg of $1,861,022 at age 65. Not bad for 35 years of savings!
Example 2: Similar to Joe, Aaron begins investing towards retirement except he begins at age 25. He is fortunate enough to invest $8,750 a year into an S&P 500 Index Fund with expectations of an 8% return.
Based on the information given, Aaron will have a nest egg of $2,448,084 at the age of 65!
Wow! Both Aaron and Joe invested a total of $350,000 into their retirement fund throughout their working career yet Aaron had $587,062 more in his nest egg! That is certainly not a small chunk of change.
While this example was oversimplified, it drives home the point: starting early matters.
Having a Long Term Mindset
Millennials grew up in a world of instant gratification. If we want an answer we hop on our computer or phone, type our question into a search engine, and in fractions of a second out pops our answer. There is no waiting anymore.
Unfortunately, retirement, and in some cases early retirement, is not a get rich overnight scheme. Saving for retirement takes years of dedication and commitment towards saving for a goal. Luckily for millennials, we have the greatest asset of all, time. This allows us to take advantage of a long investing horizon and harness the powers of compounding to exponentially increase our wealth.
Ben has spoken a lot about the outperformance of the Dividend Aristocrats compared to the S&P 500 over the past decade and this is something millennials can take advantage of. Traditionally, the Dividend Aristocrats are high quality businesses that are based on long dividend histories with low volatility. If millennials realize that investing in stocks is not gambling they have the opportunity to create wealth not only for themselves, but for generations to come.
Having a longer time frame is a distinct advantage the millennial generation enjoys. This is the reason I believe compounding can be a millennial’s greatest asset.
Getting rich is not complicated, it just takes a lot of persistence. Start investing early, save often, and be consistent.