Some weeks ago I had someone write me and ask me if there was a way to tell younger people how they might start building their money up so that by the time they were ready to retire they’ve have enough to live on for the remainder of their life. Seemed like a nice challenge to me, so that’s what this post is about.

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There’s no right age to start investing. However, for my example I’m starting by recommending that young people start by at least the age of 20. Many have either gone directly into the workforce while others might be heading into their last years of college. Based on my recommendation in this post I’m going to give you a chance to start building your wealth early and easily, and fairly painlessly early on.

I’m basing this recommendation on the premise that you’re going to do something more with your money than put it in a jar in your house on a monthly basis. I’ve made that recommendation in the past for those who can’t get used to putting money away. It’s a nice way to get started, and it can bring a nice little bump in case you need some extra money for emergencies.

Anyway, the idea is that you’re going to invest your money in some way and keep building on it. This will involve talking to a financial counselor or investor, someone who can give you the best recommendation to get the kind of return on your money over the long haul that I’m giving you.

The figures I’m going to use are based on an average return of 3% a year and 10% a year. You could end up somewhere in the middle, in which case your total will be in the middle of what I’m recommending. Here’s the thing though. It’s possible that you might not ever be in a position to stick with what I’m proposing here. No matter; once you get used to saving money, even if you have to tap into it, you’ll fall back into it pretty easily.

You’re 20 years old; happy birthday! Today, you’re going to take $10, just $10, and invest it. It’s possible that you might have to start with $100, depending on the type of investment you’re looking to do, but go with me just for the sake of numbers. You’re going to start with that $10 and, for the first year, you’re going to invest just $10 a month.

By the end of your first year, you’ll have earned $6.91; your total will be $126.91. That doesn’t sound like much does it? Okay, it’s not. But stay with me because it’ll get better.

On your 21st birthday, you’re going to bump that $10 a month up to $20 a month. You’ve gotten used to taking a portion of money from your paycheck already, so another $10 shouldn’t bother you at all. That is, if you’re also budgeting your money so you’re not living paycheck to paycheck with no clue where your money’s going.

If you bumped yourself up to $20 a month, by your 22nd birthday you’ll have earned a total of $32.25. Hey, it’s more than the $6.91 right? Still looks pretty pathetic though, doesn’t it?

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We’re not done though. From your 22nd birthday through your 30th birthday, you’re going to increase your contribution by $10 each year. Thus, $30 at 23, $40 at 24, all the way up to $200 a month by the time you hit 40. By the time, you’ll have invested $25,200 out of your pocket but your total will be up to $58.884. That’s not too shabby, but it still doesn’t look like tons does it?

Here’s where things get interesting. If you’ve gotten used to setting aside $200 a month towards your savings plan, you never have to increase that amount again if you don’t want to. If you did your money would grow even better than it already has.

For the sake of argument let’s say that you can handle $200 a month until you turn 65, which at this point is still the true age of retirement. At just 3% a year, by the time you turned 65 you’ll have around $612,000 in your portfolio. Assuming your house is paid off and you have no really large monthly expenses, you’ll have enough money to live pretty nicely for the rest of your life, even if you decide to do a little bit of traveling for a few years.

At that point, you’d be earning nearly $52,000 a year off what you’ve invested, and that’s for the rest of your life. If you spend less, you’ll have more. Isn’t it nice to have choices?

What if you did the same thing only earning 10% annually? By your 65th birthday you’d have around $730,000 to play with, earning around $65,000 a year.

That’s a nice range to play with isn’t it, having somewhere between $612K and 730K? And still earning money while just living off a certain percentage a year? The other side of this is that you don’t pay any taxes on any of it until you use it. Thus, if you took your $52,000 or $65,000 a year, that’s the only bit you’d pay any tax on. Well, that plus your social security, if that’s still around years from now.

You won’t need it if you can start this plan as soon as possible. However, let’s look at this from another perspective. What if you can’t get started on a plan like this until you’re 30? If you can start doing the same thing at 30, by the time you’re 65 you’ll have between $204K and 230K. This leaves you with less money to have in retirement, but it’s not all that bad.

One more calculation for you. What if you started at 30 but you’re making enough money so that you can begin with $200 a month? By the time you hit 65 you’ll have between $486K and $530K. That’s pretty good living money as well, especially without a lot of expenses, which you probably won’t have at that point.

This is what saving money can do for you long term. The earlier you can start, the better off you’ll be when you’re younger.

All this and we haven’t even talked about life insurance. That’ll be for another time. 🙂

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