Invest young or have fun and do it later?

I have many friends, but only two or three that actually invest. I see this as a major problem. This is directed towards my friends and other young people that aren't investing.


Consider this:

Most of my friends on myspace are a year or two above or below my age and a good portion of them have a job.

So what are you making? How much do you work?

I'll assume you work for $7.00 an hour, 28 hours a week. That's $196 per week before taxes. You get paid once every two weeks. We now have $392 before taxes. Last time I was working I had 17% taken out of my paycheck.

392(1-.17) = 325.36

So if you're getting $325 every two weeks what do you have to pay?

I'll take these two into consideration. I wouldn't expect a 20 year old living with their parents to pay much more.

Gas: ~$30 per week ($60 for two weeks)
Phone: ~$50 per month ($25 allotted every two weeks)

So that's $85 that needs to be taken out of every pay check. That leaves you with $240. If you're like me you like a beer with dinner, so that's about $10 a week. You'll need fast-food allotments; $25 for two weeks. You'll also need blow money; $60.

This leaves you with $135 from every paycheck.

Now I have no idea what your spending habits are, this is just a rough estimation.

Say you took that $135 and put the $35 into a savings account (to have emergency money on hand) and the remaining $100 into a growth stock mutual fund.

So every paycheck you'd be building your savings account with emergency money and you'd be funding a retirement account.

So what can $100 turn into if it's not spent on pointless things? Well, let's see:

Say we put the $200 a month (from two paychecks) of investing money into a mutual fund that averages 8% (a pretty conservative fund considering the overall average of the market has been almost 11% since it was created).

Let's fit this into the future value of an annuity equation.

$200 a month at 8% interest for, oh, let's say, 10 years.

200 being the monthly payment, .006666666667 being the interest rate (8%) adjusted in monthly increments, 120 being the amount of months in 10 years.

200 x ((1+.006666666667)^120-1)/.006666666667 = 36589.21

That comes out to $36,589.21 you'll have in 10 years.

$24,000 in principal, which means your $200 a month has earned $12,589 in 10 years. That might not seem like much, but it's a very conservative estimate considering your income will most likely grow considerably throughout those 10 years, enabling you to put more into the investment.

Say after the ten years you've kept to your guns and not gone into debt for silly things like TVs and other toys, and have managed to stay away from new cars (the number one mistake that college graduates make is buying the new car right when they get a job because they "deserve it") and you want to start investing more heavily into your future.

Now we're going to be hitting the market more aggressively.

$1200 a month into a mutual fund averaging 10% for 10 more years. We use the same formula.

1200 x ((1+.008333333333)^120-1)/.008333333333 = 245813.97

$245,814

Now include your previous investment that's been sitting in that same 8% fund for the past 10 years.

245,814 + (36589(1.08)^10) = $324,807

So you're 40 years old, have no debt other than a mortgage (unless you've managed to pay that down also!) and you've got a bitchin' emergency fund and $324,807 sitting there gathering that good ol' compound interest.

So you get a nice promotion and you keep sticking to your guns. You move all of your investments into that 10% fund and keep adding $2200 a month for 10 more years.

(324807(1.1)^10) + (2200 x (((1+.008333333333)^120-1)/.008333333333) = 1,293,124

That $1,293,124 at the ripe old age of 50.

You want to have $1.2 million when you're 50? We should all be so lucky. And if you want to retire at 60 and you let that $1.2 million compound at 10% for ten more years, you'll have $3,354,030. Without even adding anything for the last 10 years!

If you kept adding $2200 a month you'd have $3,804,688!

(If you upped the monthly payments to $3000 you'd have $3,968,565!)

Now let's tally up the amount you put into the investment.

The total principal if you invest for 10 years at $200 a month, 10 years at $1200 a month, and 20 more years at $2200 a month.

You would have put in a total of $432,000. That's an interest amount of almost $3.4 million dollars, all because you decided to start early and live like no one else so later you could live like no one else.

Say you plan on living to the age of 95. You've got a solid 35 years left. After you retire you could draw out $120,000 a year.

After today's capital gains tax (fancy way to say the government is stealing from your investment gains) of 15% you'll have approximately $102,000 before other federal, state and local taxes.

But the great thing is you could take out quite a bit more and still have your large nest-egg compounding in a safer, more conservative fund. There'll be plenty of money for you to live on, your healthcare, your funeral, and a little left over for donating or to give to your family.

My point is, Social Security isn't going to take care of you. You're going to have to start retiring sooner or later, and if it's later it'll be much harder to catch up. Buying stupid shit like new cars and other things is not going to help you in the long run.