Class of 2014: Here's How You Can Become Multimillionaires
Congratulations on your achievement! Your degree is a significant accomplishment, and you should be proud of yourself for reaching that milestone. Before you get too far along your life's path, you should be aware that right now, you have a once-in-a-lifetime opportunity to give yourself a decent chance of winding up a multimillionaire.
Unlike most "limited-time offers" that seem to be repeated frequently, this is one opportunity where time really does matter. It relies on you investing early and often, and then letting the magic of compounding work on your behalf over time. The longer your time frame, the easier it is. And by starting now, you just might be able to become a multimillionaire by retirement, using just the money you can invest in an individual retirement account.
How Does That Work?
The chart below shows what you might end up with at age 67, assuming you invest $5,500 per year in your IRA -- the current maximum for people younger than 50 -- and average around 8 percent per year in returns. There are four lines on that chart. The first assumes you get started now, at around age 23. The other three assume you take a few years to get yourself established before you start investing for your retirement. The difference in the outcomes is stunning.
Data from author's calculations.
Start saving and investing at age 23, and you can wind up with over $2.1 million. Wait until age 28 to start, and the number drops to $1.4 million. Starting at 33, your investment total drops below $1 million. And by waiting until age 38, it winds up closer to $600,000. The only difference is the age that you start, which makes starting your investing journey now the best gift you can give yourself.
There are no guarantees in investing, but 8 percent is in line with -- or even a bit below -- how a broad market index like the S&P 500 (^GPSC) has performed over the long haul when you reinvest dividends. Not only that, but even if the future doesn't stack up as well as the past, the reality is that lousy investing returns still beat not investing at all.
Live Like a Broke College Student
Of course, the toughest part in investing when you're young is that you're just starting out in your career with an entry level job. Your salary is low; you have all sorts of startup costs to cover; and you want some semblance of a life outside the office.
%VIRTUAL-article-sponsoredlinks%While that's all true, you have a key advantage over your older counterparts. You've probably just spent the last few years living like a broke college student, and with the possible exception of your student loans, you likely don't have many financial strings holding you back. To whatever extent you can, try not to change much about your lifestyle: Keep thinking and living like a broke college student -- drive a reliable but used car, get a low-cost apartment with a roommate, and keep food costs cheap. (Rich and beans make for a decent culinary staple, for instance.)
As you get older and more experienced, your salary may increase, but so too will your financial obligations. Things like a house, kids, age-rated life and health insurance,and so on all carry costs with them that generally increase over time (at least until the kids are grown and the mortgage is paid off). By living cheaply now in order to invest, you'll not only get that compounding magic working for you sooner, but you'll also start out with lower base expenses when those higher expense times come your way in a few years.
Ultimately, the Choice Is Yours
A little sacrifice starting now can help you wind up a multimillionaire later. Postponing your decision has consequences in that the longer you wait, the less time compounding can work its magic on your behalf.
Of course, you can still wind up a multimillionaire if you start later, but the amount you'll have to sock away will be larger. If you think coming up with $5,500 a year is tough now, just think how much tougher it'll be to come up with more later while you're juggling all those other costs.
As you graduate and start your life, you have the potential for an incredibly prosperous future ahead of you. Seize the day, Class of 2014, and start yourself off on your path to becoming a multimillionaire.
Motley Fool contributor Chuck Saletta has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our newsletter services free for 30 days.