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| Let power of compounding do the heavy lifting! |
Warren Buffett, the Oracle of Omaha, once said that in order to get rich like him, then one must start investing right away. He elaborated that if he was coming out of college and had $10,000 to invest, he would use the compounding effects of this money to let money earn more money.
This, in essence, is the most important part of investing the right way: Letting compounding interest to do most of the heavy lifting for you.
If done the right way, that is to buy/hold and investing for the long haul (on top of compounding interest), then anyone can retire early and be financially independent.
In this post, I’d like to share my thoughts on starting investing as early as possible, to achieve FIRE (financial independence retire early).
During my own FIRE journey, I always wished I had started earlier than my late thirties, to really ramp up my retirement savings. Had I understood the importance of compounding interest when I was in my twenties, I could have retired sooner than I did, instead of at the age of 48.
I could theoretically have doubled (or close to double) the amount, had I started in my twenties! This realization unfortunately comes too late for most people. For most people, this realization that they should’ve saved more and started sooner, come too late. At or near the retirement age, this realization is devastating.
The other facet of making money from money invested is time, which we don’t have when we’re in our sixties and beyond. This regret, is incredibly common among older people nearing retirement age…
That same $10000 in Warren Buffett’s example above could’ve been $452,000 (and change) if invested for 40 years at 10% rate of return. Note this is with no additional money added to the initial $10000.
This mind boggling power of compounding interest is why you must do everything in your power to invest early and hopefully keep adding to that money! To have time, in your favor, is a huge asset. $10000 may not be huge when starting out, but with enough time, it snowballs into this huge amount…
I encourage everyone to save up money as early as possible, then invest that money in the tried and true stock market. The strategy for investing, in my opinion, is quite simple: buy index funds, hold on to them, then buy more of them when market is up and also when market is down.
This simple strategy is what FIRE movement retirees have employed. There are slight variations on this strategy as everyone’s situation is different, but you can’t go wrong with this method.
If I could go back in time to tell my younger self, I would say: Please buy index funds right now then add to that account. Don’t even think about selling them, but hold on to them for 40 years. That little seed money will help your older self reach financial independence and to retire early!
My nephews and nieces are currently in their twenties right now, and are in a very critical turning point in their lives. They can repeat the same mistakes like we did (be in debt, over spend, not saving for retirement) or they can learn from our mistakes, then apply the lessons we have learned through trial and error, to invest correctly.
They are young enough and they all have this great opportunity to help themselves by investing early. Unlike myself who didn’t have a mentor telling me how to invest and why, they have me to guide them…
I wish they (and our readers to this blog) take finance posts/articles like this one, and learn, then apply them to achieve FIRE.
Please see below for my recommendations for investing. The sooner you do it, the better!
- Soon as you start earning income, open a retirement account (Roth IRA)
When we’re in our teens, we don’t often think about our retirement or our future selves. If I was in charge of our educational system, I would make finance education mandatory, and teach young adults how to invest, even at that young age.
Investing early is so difficult to do, but it makes a huge difference later on, due to all those decades of earning ‘free’ money through compounding interest.
In most states you can open a Roth IRA at age 18 at the earliest, while some states the minimum age is 19 or 20. These IRA’s are called custodial IRA’s. Typically, an adult (parent, custodians, guardians, etc) will need to open these accounts for the minor. Anyone can contribute to a Roth IRA as long as someone has earned income. *Rules may vary state by state. Please check with your brokerage firm.
If you have earned income, I recommend opening a Roth IRA, rather than a traditional IRA, as Roth IRA’s are lot more flexible. During early earned income years, most people are not looking to reduce their tax burden, therefore, a Roth IRA is the way to go. Roth IRA’s also allow tax free withdrawals in case of emergencies.
If I could go back in time, this is the one thing I would’ve done to take full advantage of all those years of compounding interest!
- When you start full time work (or any work where you get a paycheck), open a company sponsored retirement account (or IRA/Roth IRA)!
Open a retirement account when you start working via 401k or IRA/Roth IRA. Not all companies will offer a 401k, but if they do, sign up!
If 401k is not available, then open an IRA/Roth IRA.
Take advantage of several decades of compounding interest if you start in your twenties.
- Even if you’re no longer in your twenties, open a retirement account, if you don’t already have one!
In my young and stupid years, I withdrew all my funds from my retirement account (twice) to make ends meet. Have an emergency fund to use when life happens. Do not withdraw or close out your retirement account(s)!
You can start late (I was 35 when I opened one at my last job) like I did, but know you can still retire early if you really budget well, and save constantly.
As long as you’re not 80 or older, you can still take advantage of compounding interest. It’s never too late to start saving for your future…
- As mentioned above, have an emergency fund!
This is something you will absolutely need. Do not underestimate the necessity of having one. This way, if an emergency happens (and they will), you don’t have to close your retirement accounts or withdraw funds from them.
You want to leave the money as is, as long as you can, so it can grow uninterrupted, earning compounding interest.
Budgeting is so important for one’s financial well-being, that I will mention it yet again. Please budget so you’ll have money to invest regularly. The goal is to add more money to your existing pot of money, so it can grow into a huge snowball, by the time you retire.
Without knowing how much money is going out vs coming in, you won’t be able to know how much to add to your retirement accounts regularly…
In conclusion:
I always wonder what would’ve happened had I left my retirement accounts untouched. I would’ve been much better off and I would’ve been able to retire sooner than I did at the age of 48. As fun as this exercise sometimes is, it’s more productive to appreciate what I do have right now.
I opened my third (after closing out the previous two) 401k relatively late, in my mid thirties. Even so, I made it to my early retirement. I’m forever grateful for how it all worked out.
I cannot stress enough the importance of learning from my mistakes and applying the lessons to your advantage. Start investing early, budget, have an emergency fund, and add more money to your accounts. These are all the things you should do right away if you want to achieve financial independence and to retire early.
I wish you luck in your path to financial independence and to retire early!
Thank you all for reading!
Jake
Wandering Money Pig
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