Generation Y has a terrible rep for being spenders, running up credit cards, and buying expensive clothes and flashy cars (People still haven't realized the accuracy of Macklemore's "Thrift shop" to our spending habits). But regardless of which end of the spectrum you are on, we know that saving is a good thing.
"A penny saved is a penny earned" - Benjamin Franklin
If you're like me though, where Ramen is a staple along with pb and j's and cookout, you might think that you'll just save when you make more money or are a bit older. However, the numbers behind saving when you're young are absolutely astounding!
Lets compare the savings habits of two 20 year olds, Graham and Rick. Graham decided to save $2,000 a year for the next 6 years and nothing thereafter. He wouldn't touch it until he retired and invested those savings into the stock market which averages a 10% annual return over the long-run. Rick decided he was going to start saving when he was a little older and had traveled some. So when he was 35 he started investing $5,000 a year the same way and was going to continue doing so until he retired at age 65.
“Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.”-Albert Einstein
At age 65, Graham's measly $12,000 has managed to turn into $1,904,742.36 and Rick's $150,000 investment over the years has only managed to turn into $822,470.11. That's insane! But that is the power of compounding interest, a visualization of how the younger you are when you begin to save, the more time your money has to grow.
I'm going to try to help you take the idea of saving and turn it into an action. Below, I've compiled a list of the 3 simple steps you should consider taking in order to make your first investment a reality and begin utilizing the power of compound interest.
1. Save something
If you're living paycheck to paycheck or if it seems like you don't have enough to save I challenge you to reevaluate that mentality. One of the easiest ways to cut out an expense is to pack a lunch every day, choose water over a sweet tea, buy the grocery store brand named food at the store, or have social events that are free (game night vs. going out to eat). The big idea is to just save something, even if its $250 over a semester that you're going to invest.
2. Research an avenue to invest
Now that you're on your way to having $250 put aside that you're going to resist spending on a weekend road trip or a birthday present for yourself you need to look at different places to put it. The best place to make an initial investment in my opinion is a mutual fund. A mutual fund is a way to invest in the stock market with only a little amount of money- essentially buying a piece of 100 different companies which provides diversity and limits the risk of your investment. Just like in the example above with Graham and Rick, these average around 10% growth minus small fees. The fees aren't desirable but the great thing about a mutual fund is that you can withdraw or deposit without any transaction costs (most investments have an $8-$20 fee per transaction or trade for instance) This is huge for somebody just starting out! Research the different fund types and the different brokerages or maybe a local financial adviser to buy it through.
3. Make the leap
Once you dive in and take the leap of faith, no matter what your profits are or how the economy goes, you should feel proud. You had the courage and discipline to do what most people can't and save up something out of what little you had and invest in something that will likely prove beneficial.
Check out Matthew 25:14-30. This is the parable of the bags of gold or talents and gives us an idea of what Jesus thought about investing. When I was little, I didn't understand why the servant who buried (or saved) his gold was so wicked but now I understand that he was letting an opportunity go to waste. You can read about what Jesus says is the most profitable investment in my previous article. Let me know what you think and how it goes in the comment section below. Thanks!
