Get Rich Slowly

Let Compound Interest Help You Get Rich

Do you want to get rich? Is it impossible for "ordinary" people to become millionaires?

The answer is that, if you start young, it is not really that difficult to amass a small fortune and get rich.

Sit down with a financial calculator program and play with numbers. It's fun and informative.

Let's assume you have just graduated from college, are about 22 years old and just started your first real job.

If you invest just $100 a month in an IRA that grows at 10% a year, you will have about $865,000 at age 65. 10% a year compound growth is about what you should expect if the money was invested in a no-load S&P 500 Index Fund.

So for about $23 a week or $3.30 a day you would be wind up to close to being a millionaire when you retire.

However, if you can contribute the full $4000 a year to an IRA, the maximum the IRS allows right now (rising to $5000 in 2008), you could have about $2,600,000. For about $11.00 a day, you would have amassed a small fortune. If the money was in a Roth IRA, it would be all tax free. This is an excellent example of how compound growth will help you get rich slowly.

Some people are not comfortable with the stock market. It does fluctuate and have down years. So if you put your IRA investment in a CD paying 5% a year, you would still have over $600,000.

If your grand aunt leaves you $10,000 in her will and you invest it for the same 43 years at 10% without adding another cent, you’d also have over $600,000 if you placed it in a tax sheltered account.

[This is an excellent illustration of how much extra money you can accumulate by investing your tax sheltered money in higher yielding investments. In the CD example, your total investment is $172,000. In the inheritance example, your investment is only $10,000. Yet the outcome in both scenarios is pretty much the same.]

Time and the power of compound interest are on your side. So if you’re in you twenties and want to get rich, do whatever you have to scrape together that 401K or IRA contribution. Every day you procrastinate is another day your money is not working for you.

Most people in their twenties need the money for more important things, like new cars and HDTV’s. You also have school loans to pay, children to raise and the new mortgage to pay off.

But if you prioritize your life and stick to a budget, $11.00 a day is doable, although you might have to scrimp here and there.

Consider the fact that most people spend their lives paying the freight for borrowing other people’s money. When it comes time to retire, all they have to show for their lifetime of labor is a pile of receipts.

If you save and invest, other people are paying you to use your money. It’s a lot more fun to see your money working hard helping you get rich than having to do extra work yourself.

Also, think about the effect current expenditures will have on your financial future. If you buy a late model used car instead of new one, you would probably save $10,000 or more depending on the model. That $10,000 as noted above, would grow to almost $600,000 by the time you’re 65 if invested in tax sheltered

accounts. Now look at it from the opposite angle: the extra money you spend on that new car you yearn for and must have now, will cost you $600,000 by the time you’re 65 and the car has long since been recycled into tin cans.

I’d probably buy the car too, but it’s useful to consider the consequences. You should never pay for depreciating assets with debt. Use debt only when it will add to your wealth, not subtract from it.

The Later You Start The Harder It Gets

It gets harder to get rich as you get older. The time needed for compound growth to really kick in is too short.

If you wait until you’re 32 and put away $4000 at 10% in a tax sheltered account, you would have about $975,000, still a respectable amount. At 42, you’d only be able to accumulate approximately $350,000. If you’re 50 and can start putting $5000 (the makeup figure for those over 50) in an IRA today, you’ll have around $175,000 at age 65.

Everyone knows that Social Security is not going to allow for a comfortable retirement. Even if the plan can continue to pay out forever, which is questionable right now, the money you receive will be far from generous and is subject to taxation.

And you might have a good pension plan at work now, but will you be able to hold your current job to retirement? Or will your employer turn over its pension obligations to the government as many have already done?

If you fund a Roth IRA, you can withdraw the money tax free after age 59 ½ (as long as it has been on deposit for at least five years). Imagine having a million tax free dollars you can play with? It will well make up for the small sacrifices you have to make today to get rich in the future.

No matter what your age, start saving what you can now - today. Even if you only amass $100,000, you’ll be better off than most people entering retirement.

Becoming really wealthy will not happen all by itself. No one will force you to do it. But start now and you will be very happy later, when you reap the rewards.

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