What’s the number 1 investing mistake? Waiting until you have enough money to start investing. Don’t do this! You might feel that you don’t have any money, but that’s a Goddamn money mirage keeping you from your hard-earned millions! Let me ask you a question. Do you think you have enough money to pay $1,500* in taxes? Because if you earn $70K a year, you are already doing that, every month, without thinking about it.
Uncle Sam is more than an old man with a beard and a hat. He’s a smart dude. He knows that he’d better take his money first, or he might never get it. (I know that’s a slight exaggeration for a law-abiding citizen like yourself, but you do get my point, right?) Once you get your check, it’s going to feel like there isn’t enough for one more thing. That’s just the way it seems to work out.
So, take the old man’s lead and pay your future self before you get your paycheck. If he’s taking $1,500*, do you think if you took 1% for yourself, and invest it in your Roth 401(k), you’re going to feel the difference? Of course not! The only thing you’re going to feel is the time it takes to go to HR and set it up.
Now, don’t scoff at 1% because it’s going to make a world of difference! This is how 1% stacks up over a lifetime of investing. First, you get an “out of the gate” bonus because most companies offer a match. So, when you start investing your 1%, it instantly turns into 2%. If you do nothing else, at age 65, you will have $195,078!* * That’s almost a quarter of a million bucks, and this number is adjusted for inflation. (What that means is your account will say that you have $363,297 but it will feel like $195,078 in spending power.)
If you go wild and start investing 2%, which turns into 4% because of the company match, at age 65 you will have $390,155! (Again your account balance will say you have $726,596, but it will feel like $390,297 in spending power.)
Now, I want to unveil why this mistake is costing you so much money! You are missing out on the greatest money maker of all: Time! Time is what’s bringing home the bacon.
Let’s run the numbers and compare, if you take action now and invest a dinky 2% per year, or wait until you have more money. The numbers make it clear. If you wait, you’re going to have to come up with a lot more money. If you start investing 2% now, at age 27, you would invest about $99K to receive $390K at age 65.
If you wait 10 years, you will need to invest 5%, bringing your total investment cost to $155K, a $55K increase, to receive the same $390K.
If you wait 20 years, you would have to invest 14%, bringing your total investment cost to $236K, a $137K increase, to receive the same $390K.
Now the $390K question. What would be easiest? Investing 2% now and letting time do the work, or waiting and paying 2.5 times as much for the same $390K? The answer is clear. Get your cute butt down to HR and enroll now. You don’t have to find any money; it’s there waiting for you.
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*all numbers have been rounded to the nearest $1,000 to make it easier to digest.
**The assumptions for the calculations are as follows: $70K starting income. Annual salary increment of 3%. Starting age 27. Retirement age 65. 7% annual return. Annual inflation 3%.