Hello! Today I have a post written from a blog friend of mine. I was able to meet her at FinCon and talk to her quite a bit. She has a great blog and I definitely recommend that you check it out. This post goes along well with my recent post Why You Should Invest and Save For Retirement – Plus a Personal Finance Confession Fail. Also, if you are new here, check out my latest online income report – $14,136 in October Income.
There’s a myth out there that you need to be rich to get started investing for retirement.
You may think that first you have to pay off all of your student loans. Then you need to squirrel away $25,000 in savings. Maybe buy a house. Start earning an income of $100,000 each year. Only THEN would you consider yourself “qualified” enough to become a Capital-I Investor.
The problem is: waiting too long can threaten your ability to retire at all.
Because here’s the deal—the math is in your favor to start as early as possible. Even if that means starting with a measly $100 or so. (Seriously!)
If you need a refresher, here’s why, in math terms.
Meet Ambitious Amy who starts investing $5,000 per year starting at age 25. When she turns 35, she stops investing.
Now meet Slightly Later Sally starts investing $5,000 per year starting at age 35. Like Amy, she stops investing exactly 10 years later when she’s 45 years old.
By running some easy math, you’ll see that both women invested exactly $50,000 over the course of 10 years.
By running some fancier math (compounding 8% returns), you’ll see that as they reach age 65, Amy—who started investing at age 25—has over $400,000 MORE than Sally.
The only difference? Time.
Being someone who definitely wants the extra $400,000, I decided (at age 22) to max out my Roth IRA ($5,000 at the time) when I was earning just $28,000 per year.
Here are 5 key things I did to reach my goal, and maybe a few of them can help you if you’re looking to invest early and on a small income:
Behavior #1: I didn’t let my debt stop me from investing.
When I graduated college, I had a small $4,000 student loan and a $12,000 car loan.
Like everyone, I had heard how bad debt was, and of course I wanted to pay it off. But I really wanted to invest, too.
My debt only carried interest for as long as I had the loan (just 5 years for each), but invested money grows darn-near forever. When I look at $400,000 at the end of the 45-year road, I definitely believed I could find a way to both save and pay down debt!
I paid the minimums on my debt that year (although I did add more when I earned more), and sucked up the couple hundred dollars in interest payments. I was in it for the hope of big money later on!
Behavior #2: I prioritized my savings and automated it.
Setting an aggressive savings goal is only half of the battle. In order for me to make my goal a reality, I had to prioritize saving $400 every month to make it happen.
Of my $1,800 monthly paycheck, I set up an automated transfer to my Roth IRA every month.
(I opened a Roth IRA because I didn’t have a 401(k) at work. If, however, you have a 401(k) available to you—and especially one with a match—you’re likely better off to start there!)
If you need help determining if you should invest in a Roth IRA or 401(k), keep reading.
Behavior #3: I became a slave to my budget.
As soon as I realized I’d be living on $1,400 per month, I started becoming obsessed with my Mint budget. I checked that thing every day, gained a big sense of control of my money, and closely monitored that I’d have enough for living expenses.
Things were tight, but I decided to keep living sort of like a college kid for a while. I envied some of my friends who made more and spent more, but I sort of saw it as a game—how long could I go without X? How could I use what I had to avoid spending?
It was tough, but I had a mission much bigger than myself!
Behavior #4: I built a plan, even if I couldn’t do it perfectly right away.
Using some online calculators, I learned that I’d need to save over $2M to live my preferred lifestyle in retirement. (Gulp!)
In order to get there, I had to start investing around $8,000 per year.
I couldn’t save that much right away, but I got started doing the best I could (I mean, $5,000 is no chump change!)
Remember: it’ll take a lot for you to retire someday. So much so that it seems like it’s not even worth getting started. I could’ve gotten very self-defeating at that point, but instead, I put one foot in front of the other and kept on trucking.
Behavior #5: I became obsessed with learning how to invest.
I read nearly a dozen books on investing, set my homepage to the Wall Street Journal, and pored over investment choices for hours to get a feel for what I was getting in to.
I loved learning so much, that a few years later I started studying investing as part of my Certified Financial Planner designation.
That’s how I developed the 6-step investing process that I use myself and share with my clients.
And now I’d like to share the same process with you! Join me for the FREE webinar “Invest? Yes! 6 Steps to Fearless Investing.”
Like anyone would, I had questions about whether I should pay off debt or invest. I also had moments of dissatisfaction with being so frugal, and difficulty understanding which investment strategies were right for me.
At the end of the day, however, I focused in on one really powerful idea: If you’re willing to live like no one else will today, you can live like no one else can tomorrow. And that’s what I’m really after.
Leah Manderson is a financial planner for women and young couples. Join her on Tuesday, November 18 at 5:00PM PT / 8:00PM ET for her free webinar “Invest? Yes! 6 Steps to Fearless Investing.” Get the details and sign up here.
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James McAllister says
November 14, 2014 at 4:52 amHi Leah,
It’s funny that I stumbled across this because I was just reading the classic book, “The Richest Man In Babylon” and one of the lessons taught is to save and invest a percentage of your income, no matter how small it is. If you haven’t already, it’s a fun read even though you probably already know all of the concepts taught in the book.
I’m in college at the moment, and it’s crazy how poor the students around me seem. They tell stories about how they can only afford to eat ramen, and have to walk to and from school. The funny thing, is they have jobs. Not good paying jobs, but jobs none-the-less. Despite how poor they act, you’ll look at them and they’ll be wearing brand-name clothes and holding a $7 drink from Starbucks.If only they knew (or cared) about how much better off they’d be if they saved and invested that money and lived a bit more frugally. I believe how you spend your money is just as important as how much you make.
I’ve been interested in investing since I began learning about it in middle school. My freshman year of high school I started a web business, and a few years later it’s doing fairly well. Admittedly, I still live with my parents (hooray for no living expenses) but this has allowed me to invest most of my income, mostly into Vanguard funds or back into my business. I’m loving it.
Great post Leah and I’m looking forward to your webinar next Tuesday.
Leah says
November 14, 2014 at 8:26 amHey James!
I LOVE ‘The Richest Man in Babylon’! I recommend it to a lot of people who are new to money management because it’s so easy to understand.
And what you said about the way people earn & spend in college is so true. I remember feeling like everyone at my university was so much richer than me because of the name brand clothes and big nights out and greek life parties and all that. It was only later that I learned they were spending their student loan checks on that stuff, not that they were really so much more well-off than me.
Can’t wait to see you on the webinar. 🙂
Thomas @ i need cash now! says
November 14, 2014 at 8:41 amHi Leah, James, thanks for the book recommendation. I love personal finance books and have read quite a few but haven’t read this one yet. I’m ordering it from the library now 🙂
Young Millennial says
November 14, 2014 at 5:33 amGreat post. Very inspiring and puts me to shame for not working harder to cut expenses, stick to a budget and invest more of my income.
Leah says
November 14, 2014 at 8:29 amOh, don’t feel any shame!! I was especially motivated during this period of my life, and had the benefit of just being fresh out of college and willing to live like I was still in college–cheap apartment, ramen noodles, worn-out car, the whole thing.
It would be MUCH harder to do this now that I’m in a different period of my life!
Just take whatever little tidbit most resonates with you and try to apply it where you are now. No shame 🙂
Amy says
November 14, 2014 at 7:44 amGreat reminder that every little bit counts, especially early in adulthood.
Leah says
November 14, 2014 at 8:35 amI remember my dad harping on the time value of money when I was a kid–making it sound like if I *didn’t* invest early, that I couldn’t retire at all (when really, that’s not the case!). However, I do think that sense of panic motivated me in a big way!
I was like, “if I don’t max out this account, I’ll have to eat dog food in retirement,” which made it easy to turn down most non-essential spending.
I think I have a healthier balance now, however 🙂
Will.i.am lolz says
November 14, 2014 at 8:37 amI started maxing out my Roth IRA when I was in high school. Just because my expenses were so low. Props to you for doing it with having all those necessary expenses!
Leah says
November 14, 2014 at 10:26 amWhoa!! That’s awesome, Will! What were your methods of saving? How did you get comfortable with socking away that much instead of spending it on high-school things?
I *started* my IRA in high school, but I was by no means maxing it out at that point 🙂 I remember being, like, stupid-proud to put in $250 to start, and watching that investment like a hawk, 5 times a day or so, haha!
will - first quarter finance says
November 14, 2014 at 10:44 amI just realized 98% of what I wanted to buy I would quickly fall out of love with. So instead of buying crap, I bought investments. So when I graduated college, I had $100k in cash and investments.
Stupid-proud, lol. I did the same thing when I made my first investment. I even tried to set my browser to auto-refresh. Now, I can barely remember my Vanguard password.
Kayla @ Femme Frugality says
November 14, 2014 at 9:22 amGreat tips! I do invest in my 401K (with match) at work. I’m not close to maxing it out as I have a TON of debt to pay off, but I am putting in about 15% of my salary each year (including the employer match). I love how your broke it down and said how you made savings/investing a priority! Great post 🙂
Leah says
November 14, 2014 at 10:18 amHey Kayla! Thanks for your comment.
It’s funny what you said about just making savings a priority.
I feel like a lot of people are looking for tactical tips, systems, apps, tools, etc. to help them save, but the truth is that ‘making it a priority’ is the best way to reach (or at least get close to reaching!) goals.
Andy Hough says
November 14, 2014 at 10:15 amI maxed out my $5500 IRA last year on a salary of just less than $28,000. It isn’t that difficult to do if you have no dependents and live in a low cost of living area.
Jayleen Zotti says
November 14, 2014 at 10:29 amWe contribute to the hubbie’s 403b (I think that’s what it’s called). We started out at the match amount and built our way up to 10%. I would like to contribute more to our Roths. Can you tell my hubby is the investment guru in this house? Lol! I better go read the post he wrote on it a while back;0)
kammi says
November 14, 2014 at 11:56 amGreat Post!! I’m in the “maxing out my IRA” club. There are no excuses. Just do it! Have a great day!
Robert Connor says
November 14, 2014 at 1:34 pmWe like your great tips on money!
Joseph Hogue says
November 14, 2014 at 8:46 pmGreat list. It’s so hard to build habits like these but super important. I’m glad I started early. Now, every time I hear a statistic on how much the average American has saved (an insanely low number even for those close to retirement) I get a big sigh of relief and can feel good about my future.
I would add, understand my tolerance for risk. Too many investors focus only on return and reach for high yields in stocks. When the market falls, those that cannot overlook near-term losses end up panic selling and their returns suck over the long-term. If you can take losses without getting worried, stay in stocks. If you get skittish at the first sign of market weakness, then you might want to stay in bonds.
Mrs. Maroon says
November 14, 2014 at 10:42 pmI appreciate you sharing your advice and experience as a way to help educate young people how to really capitalize on their investment potential from the very beginning of their career. In the realm of personal finance enthusiasts, you have shared an amazing article.
But for helping newbies get started I would think you last point about reading and researching so much could scare folks away. Sound PF is not rocket science. And I’d never want someone to shy away from it because they weren’t able to become experts in the field. Really they just need to get started. And then work on improving strategy down the road if needed. But get to SAVING!!
Jon @ Money Smart Guides says
November 26, 2014 at 2:25 pmI was like you when I graduated. I had some debt but I wanted to invest too. I kept putting a little away each month to invest and it has made a huge difference now 15 years later. I’m so glad I invested throughout that entire time. It may not seem like much money at the time, but over time, it certainly adds up!