Simple guide to invest

If you’re fresh out of college and starting a new career, investing for your retirement may be the farthest thing from your mind. But don’t be so shortsighted! Given the somewhat tenuous state of the Social Security system, you’re may have to rely on yourself to provide for your retirement. And if you’d like to retire sometime before you’re 80 years old, you need to start investing as soon as possible.

There are a number of reasons to start investing early. First, you may be lucky enough to receive matching contributions from your employer. The way it usually works is you commit to put a certain percentage of your salary into a retirement account and your employer rewards you by putting in a certain percentage as well. Now there are very few times in life when you’ll get free money like this, so if your employer offers this perk, jump on the bandwagon immediately!

Second, the longer your money stays in your account, the more you stand to gain. You expect your investment to grow, maybe by as much as 8-10 if you’ve invested in CDs or bonds. But what’s cool is that as your money is growing, you’re earning interest on both the original amount of your investment and the amount of interest it’s earned. This is called “compounding interest.” If you can leave the money in your account for 20-30 years or so until your retirement, you’ll likely find that the amount you’ve earned on your interest is greater than the amount you originally contributed!

So let’s look at a scenario from The Motley Fool Investment Guide for Teens:

Marge saves up her money and invests $1,000 each year from the time she’s 15 until she reaches age 30, making her total investment $15,000 over 15 years. Homer doesn’t start investing until the time he’s 35, when he panics over whether or not he’ll be able to retire. He puts aside $5,000 each year until he retires at age 65, making his total investment $150,000 over 30 years. Assuming each has earned an 11% return on their investment, Marge will have $1,473,172 in her account when she reaches 65, compared with the $1,104,566 in Homer’s account when he hits the same age.

Pretty crazy, huh? Marge stops investing at age 30 and puts in $135,000 less than Homer and still beats him by $300,000 when they’re ready to retire. That’s the power of time and compounding interest in investing.

When you’re younger, you’re also able to take more risks with your money and chase the stocks that might make you rich. You can take a chance on the next big Microsoft, even if it winds up being a poor investment. If you’re 25 and wipe out your portfolio on a bad stock, you’ll still be able to make it up in the long run. But if you’re 55, you can’t be as aggressive with your investments – you’ll need to keep your money safe for retirement.

Clearly, investing early is a great way to secure your financial future. Ask your employer’s benefits coordinator if your company offers any matching benefits and enroll immediately if they do. If not, you can open up a private IRA account and start saving on your own. It can be a stretch – money can be tight when you’re just starting out and setting aside money for retirement can seem unnecessary. But look to the future and think about the type of retirement you’d like to have. After all, which would you prefer? Spending your golden years still working or slipping away to a tropical paradise knowing that you’re financial needs are taken care of?
by: Sarah Russell