We all love instant gratification. Our society wants everything today, if not yesterday. The thought of saving money for things we want to do 30 years from now in almost incomprehensible, however this is the way we need to think. I’m not saying don’t do anything today but try to think of what you want your life to be like closer to your retirement age.
It takes years to build up enough funds for retirement. You need to start now. Saving isn’t fun and it isn’t glamorous, but you need to do it if you want to live a fabulous life later on. I recommend saving between 20-25% of your income and investing it in a low-cost mutual fund or index fund. Your ultimate goal is to earn between 6-8% annually on your money and that is impossible to do with today’s low interest rates that banks offer in a traditional savings account. You will need to invest in a more aggressive strategy.
If you don’t know anything about the stock market, you have 2 choices. Either hire an investment professional or open an account with an online brokerage and place your money in a mutual fund or index fund that tracks the S&P 500. The S&P 500 is a group of the top 500 publicly traded companies; companies like Apple, Exxon, Microsoft, etc. Historically over the last 30 years, the S&P 500 index has averaged around a 10% return. The benefit on putting your money in an index fund is that if one or two stocks become highly volatile, you won’t be affected as much as if you owned individual company stock.
After opening an account, be consistent. Consistency + Time = Money.
Every month take a sum of money, whatever percentage you feel comfortable with, and invest it in your fund. Don’t worry if the market is up, or down. If it’s down, that means you’re actually getting a better deal. And most importantly, as volatile as the market can get…do not sell. I repeat, DO NOT SELL!
I made the mistake of selling my entire portfolio after the dot com bubble burst, losing tens of thousand of dollars in the process. If I just held on to my stocks and waited out the storm, I’d be extremely comfortable today. Those stocks, the ones that dropped 30-40% during the bust, are now exponentially higher (with a few exceptions). I kick myself every time I think back to that period of time and how I let my emotions get the best of me. Stocks will go up and they will go down. It’s just the nature of the market, but as you can see by the chart below, history suggests that over time the market will go up. You just have to give it time.
So, take some Dramamine, buckle up and enjoy the ride, because when the ride ends 30 years from today, you will be a very wealthy gay!