If you have just graduated from college and are about 22 years old and if you put $100 a month in an IRA that grows at 10% a year, you will have around $865,000 at age 65. 10% a year is about what you should expect if the money was placed in a no-load S&P 500 Index Fund.
So for about $23 a week or $3.30 a day you will be close to being a millionaire.
If you contribute the full $4000 a year allowed right now (rising to $5000 in 2008), you would have $2,600,000. For about $11.00 a day, you would have a small fortune.
If you didn't want to take a chance with the stock market (after all, it goes down sometimes), you would still have over $600,000 if you could get a 5% return.
If your grandmother leaves you $10,000 in her will and you invest it for the same 43 years at 10% without adding another cent, you'd still have over $600,000 if you placed it in a tax sheltered account.
Time and the power of compound interest are on your side. So if you're in you twenties, do whatever you have to scrape together that IRA contribution. Every day you procrastinate is another day your money is not working for you.
However, most people in their twenties need the money for more important things, like new cars and HDTV's. You also have student loans to pay, children to raise and the new mortgage to pay off. But if you prioritize your life and stick to a budget, $11.00 a day is doable, although you might have to scrimp here and there.
Consider that most people are spending their livings paying the freight for borrowing 'other people's money".
If you save and invest, other people are paying you to use your money. It's a lot more fun to see your money working than having to work yourself.
It gets harder to amass wealth as you get older. If you wait until you're 32 and put away $4000 at 10%, you would have about $975,000, still a respectable amount.
At 42, you'd only be able to accumulate approximately $350,000.
If you're 50 and can start putting $5000 (those over 50 are allowed "catch up contributions") away today, you'll have around $175,000 at age 65.
Everyone knows that Social Security is not going to allow for a comfortable retirement. Even if the plan can continue to pay out forever, which is questionable right now, the money you receive will be far from generous and is subject to taxation.
You might have a good pension plan at work now, but will you be able to hold your current job to retirement?
If you have a Roth IRA, you can withdraw the money tax free after age 59 ?. Imagine having a million tax free dollars you can play with. It will well make up for the small sacrifices you have to make to get there.
No matter what your age, start saving what you can now - today. Even if you only amass $100,000, you'll be better off than most people entering retirement.
In the investing world (and in the business world as well), the formula for success is to "buy low, sell high". Due to its "instant results" nature, the stock market is like a dream come true for investors hoping to strike gold using that exact formula. Although the strategy sounds simple, as most investors (and many non-investors) know, timing the market is a tricky proposition.
Proponents of the market timing strategy point out that if you're able to correctly predict the direction the market (or a particular stock) is going to take, you're going to make much more money than people who catch a trend that's already formed. For instance, a stock that's accurately predicted as about to go up can be purchased, (or you can buy call options) and then you make a profit off the price increase. Or if you accurately predict that a stock is going down, you can sell it if you owned it, or you can short it and make money off of it while it's going down.
All this sounds great, but accurately timing the market is a very hard thing to do. And some studies suggest that it's not even that important that you try to. Meet Louie the Loser - he invested $5,000 a year in one of America's oldest and largest mutual funds, Investment Company of America, over the past 20 years. But because his timing is terrible, every year he picks the worst possible day to invest - the day the unmanaged Dow Jones Industrial Average peaks.
Surprisingly, Louie has managed to do very well. After those 20 years, his $100,000 had grown to $441,000, averaging a respectable annual return of 13.3%. Even more surprising was the fact that if he had followed that same strategy, but invested on the day the market hit its annual low, his average annual return would have been 14.9%! That's only slightly better than Louie's performance, with none of the anxiety and risk and aggravation of trying to time the market.
The reason why dollar-cost averaging is so effective is very simple. By investing a set dollar amount on a regular basis (say, $250 a month), you get more shares when stock prices are low and fewer when they are high. Over time, the strategy reduces your average cost per share, improving your chances of becoming a slow but steady winner.
What does that teach us? To put it bluntly, market timing is overrated. Dollar cost averaging offers returns that are not that far-removed from the hypothetical best-case market timing scenarios.