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Building Wealth on $1.67 Per Day!
By JLP | November 2, 2006
How’s that for a catchy title?
This post was inspired by the following comment I received from a reader:
This (and most of your other entires, and the PF community) have got me thinking about starting a Roth IRA for that lovely compounding interest (I’m only 19!). But when I contacted my bank (ING), they were utterly unhelpful. They said, okay, pick what funds you want to invest in, and how many shares of each and we’ll set it all up. Do you have any advice on what I should do without knowing my current financial situation? My rundown is: I have about 1,000 in savings, very little cc debt, and my student loans are locked in at low interest rates that I won’t have to pay off for years. I’m planning on starting out with $100 and adding 25-50 a month.
Although I can’t recommend a specific company or mutual fund to invest in, I will say to check out Vanguard and T. Rowe Price as both are stellar companies. You also might want to read this post from yesterday.
Her comment got me to thinking. At first glance, $50 per month doesn’t sound like much. It works out to be about $1.67 per day. However, don’t let the small amount fool you. Given enough time, $50 per month can grow into a substantial amount. Take a look at the three graphics and you’ll see what I mean. Don’t let all the numbers scare you away. The graphics are divided up based on the expected rate of return of 8, 10, and 12 percent. I used 19 as the starting age since that is the age of the commenter. Even at an 8% rate of return, $50 per month could grow to more $286,000 by age 65.
You can click on each graphic to see it larger.
Now keep in mind that these numbers were reached using a straight-line rate of return, which never occurs in the real world. Nor do these numbers reflect inflation, which will reduce the real value of the account at retirement. So, although $50 per month can grow into a substantial amount over a lifetime, it would be best to invest more if you can afford it.
Oh, and for those who want to play around with the numbers themselves, feel free to download the Excel file I used for this post.
Topics: Calculators, IRAs, Investing, Retirement Planning, Roth IRA | 14 Comments »
November 2nd, 2006 at 8:48 pm
You should post all these excel files under a separate header, something like ‘useful tools’ .. .I think it may be really beneficial for users …..
November 2nd, 2006 at 9:50 pm
We’re doing exactly this with the “Million Dollar Savings Club”. Thanks for posting this. I’ll pass it along to my readers.
- Bryan
http://www.BryanCFleming.com
November 3rd, 2006 at 1:08 am
The magic of compound interest is a powerful tool in convincing young adults/teenagers that investing works. When I explained to my 18 year old brother that he could invest his $5,000 of poker winnings and in 50 years it would be worth $1.5 million, he was blown away.
Keep of the good work, JLP.
November 3rd, 2006 at 8:52 am
I don’t mean to discourage anybody. I think saving small amounts starting when you’re young is a great idea. Doubly so since I didn’t do it when I was young and am having to make up for it now…
Over a 50 year period, inflation of 3% will erode the purchasing power of your dollars by about 3/4. So 1.5M at that time would be worth about $375,000 in todays dollars. Still a decent amount of money but not enough to retire on. An 8% return is probably ok to rely on over the long-term but 10-12% are a bit optimistic.
My advice is to save as much as you can and increase it as your income rises, or you receive unexpected windfalls. Don’t save it all however, you still need to live a little.
November 3rd, 2006 at 11:40 am
Five for Friday – News You can Use
November 3rd, 2006 at 11:41 am
These are great, I’ll be showing this to my 14 year old this weekend!
November 3rd, 2006 at 11:58 am
Not that this is the best place to sock away funds, but Sharebuilder.com has a nice Roth IRA setup. Just automatically deposit your funds, and you could even leave them alone and not make any purchases. This would give you about 4%, I think, until you get to a decent amount of money, and then you could move to a better place, like Vanguard, so you can avoid all the rules they would put on you. This would leave you with no fees. In addition, Sharebuilder probably has some offer where they will give you some free trades for opening an IRA, as they can’t give you any promo money since that it is an IRA.
November 3rd, 2006 at 1:55 pm
[...] Building Wealth on $1.67 a Day – Great example how compound interest works wonders for young people. [...]
November 3rd, 2006 at 4:15 pm
I’d like to restate what Personal Finance Blogger said. He even left taxes out of the equation, so it really could be worse than $375K. It’s convenient to leave these out though when you are trying to illustrate the power of compounding interest.
November 4th, 2006 at 9:47 pm
Thank you so much for the recommendations, and answering my question!
November 5th, 2006 at 10:14 am
[...] Building Wealth on $1.67 Per Day! @ All Financial Matters. JLP talks about how fast you build up wealth with $50 dollars a month. Complete with Excel grids. Weee! [...]
November 16th, 2006 at 4:21 pm
[...] JLP had a great article last week in his blog AllFinancialMatters. In his post “Building Wealth on $1.67 per day” he lays out some pretty nice graphs for how much money you’ll have years from now. [...]
February 13th, 2007 at 10:39 am
I want to comment on what “Lazy Man and Money” said.
“I’d like to restate what Personal Finance Blogger said. He even left taxes out of the equation, so it really could be worse than $375K. It’s convenient to leave these out though when you are trying to illustrate the power of compounding interest.”
Well, that’s under one assumption. That the person didn’t use a Roth IRA (or Roth 401k). Then taxes have already been taken out of the picture.
As for inflation, I just checked a CAGR value for milk. 65¢/gal when I was a youngin, and now it’s about $3.27/gal (around 40 years later). That’s a compounded annual growth rate (CAGR) of 4.1%.
April 15th, 2008 at 3:27 pm
I was wondering if these numbers include reinvestment of dividends.