Let’s assume that, starting at the age of 25, you took that $100 per month and opened an IRA account that allowed for retirement savings with tax-deferred growth. Let’s also say you invested that IRA in an S&P Index Fund and consistently did this — month after month, year after year — until retiring at the age of 65. That mere $100 a month over 40 years would total $48,000. Not too shabby. However, thanks to the concept of compounding, the actual balance in your IRA account would amount to nearly $260,000! (That's based on a compound annual growth rate of 7 percent, and adjusted for inflation.) Beautiful, eh?
Sure, you worked hard for that $48,000 but not nearly as hard as that same $48,000 worked for you — it generated almost four and half times more money. Now imagine the impact of cutting out two, three or four bad habits per month — perhaps even saving enough to invest the maximum allowed in an IRA each year ($15 per day, $458 per month or $5,500 annually, if you’re 49 years old or younger). Using the same annual return rate and inflation rate, your new balance in that same IRA account could amount to as much as $1,175,000. Yet, the total dollar amount that you actually worked for was only $220,000. Pretty cool stuff!
Obviously, not everyone is 25 and has the luxury of time on their side. But, keep in mind, you actually have more time than you think. With the average life expectancy of a woman being about 80 to 86 years old, there is still a lot of muscle left in your dollar. And there is no time like the present to put your money to work.
Here is a simple, three-step program for building your net worth:
Step One: Open up an account.
IRAs have tremendous tax advantages and are terrific retirement vehicles; however, the same math can apply to investment accounts with a bit more liquidity.
Step Two: Set up monthly, automatic withdrawals.
The actual amount you invest isn’t the most important factor — it’s the commitment to be consistent. Not only do monthly contributions eventually add up, they enable you to effectively ride out fluctuations in the market. This is the “dollar cost averaging” principle and a proven technique designed to reduce market risks.
Step Three: Be disciplined, focused and patient.
A significant increase to your net worth doesn’t happen overnight. Just as in Aesop’s Fables parable of “The Tortoise and the Hare,” slow and steady wins the race. Remember your long-term goal of financial stability and freedom.
Steph Wagner is a member of the DailyWorth Experts program. Read more about the program here.