Many college students, including myself, want to have fun and spend money on partying during this time in our life. I'm here to tell you why it's important to have fun, but also start investing for the future. Retirement and your mortgage are both huge expenses that we will all face in the future. Being financially prepared will encourage a better outcome for all of these events. In this article we're going to outline some of the benefits of early life investing.
Retirement is something that seems like forever away to most of us young adults. "I can start saving for retirement when I get a 'real' job". "I don't need to worry about retirement for at least 20 more years". "We want to have fun now and we'll figure retirement out later". My friends frequently say things like these and so I think it's time we as a community address this common thought pattern.
Many experts believe that a million dollars or more is required for an individual to comfortably retire. People are living longer, and living costs are continuously increasing. Therefore total expenses over a 20+ year retirement will continue to go up. Social security helps fill some of the gaps, but it is not something anyone should be expecting to live on for the rest of their life.
The prevailing trend in the past has been to start saving for retirement in your late thirties, early forties. But that only leaves approximately 25 years to save, compared to 45+ years if you start in your early twenties. Just to prove my point numerically, we'll set up a scenario and crunch the numbers.
Example: At age 40 an individual invests $6000 a year until they're 65 and they retire. With an average return of 7% (the accepted long term return) this individual would have approximately $406,000 at the end of the 25 years.
Using the same parameters, but starting at age 20, we find that this individual would have $1,834,510 after 45 years of investing.
Now to address the obvious. The likelihood that a 20 year old can save $6000 while still going to school is very low. The main point is that compound interest is an incredible thing. Small contributions at a young age, coupled with the continuous upward trend of the stock market, create an environment for reliable and substantial growth!
Buying a house is another event that seems quite far off for most of us. The majority of the reading audience is living in dorms or apartments while they're at school. Unfortunately college does end and our primary goal is to educate you on what to do during and after school.
Housing prices are continuously moving upwards, that's just a fact. The best way to combat the continuous inflation of living costs is investing in a smart and meaningful way and letting your money work for you. Using some of your investments to put a down-payment on a house not only lowers the total cost of paying for a house, but it's also an investment in itself. The equity you have in a house will increase over time and you can use this to your advantage.
Investing now will allow you to make that down-payment on a house and start your journey toward home ownership. If every 18 year old saved $100 a month from a part time job and invested in the market, they would have approximately $23,000 by the time they were 30 years old. $23,000 isn't chump change, and that's a sizable down payment for most homes.
Both buying a home, and retiring are not as far away as most of us would like to believe. Just think about how quickly high school went by, and how fast college is flying by. Things don't slow down in the adult world, and being prepared for these upcoming financial responsibilities is something we can do now.
If you want to learn how to get started investing, please check out our article How to Start! If you've already started your investment journey, check out our article 5 Thing Every New Investor Should Know where we outline some of the basics of investing.
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