Getting started at investing
On a recent radio interview, I was asked to talk with a 19-year-old college student about her financial future. Like most students, she expected to graduate with federal student loan debt.
But she had a positive attitude, and was working while in school. She wanted some advice on how to get started investing with only a small amount of money.
That got me thinking about the advice I gave in my first book, “Terry Savage Talks Money,” published in 1990. The same story is also included in my most recent book, “The Savage Truth on Money” (3rd edition), published just two years ago, because it has stood the test of time.
Time is money
When you're young, time seems unlimited but money is scarce. My goal was to get young people to leverage their best asset: time.
I started by pointing out the dangers of debt. I noted that if you charged $2,000 on your credit card, at a 19.8% annual interest rate (and a $40-a-year fee for the card), and if you made only minimum monthly payments on that debt, it would take you 31 years and 2 months to pay off the balance. Plus, you would have paid slightly more than $8,000 in interest!
On the other hand, if you invested that $2,000 in an IRA using a S&P 500 stock index fund — which had an average historical return of 10.1% — your account would be worth $38,389 at the end of that same 31-year period. And, if you invested only $2,000 in your IRA every year for that 31 years, your account would be worth $364,000 in 31 years.
I noted that while young people might not have an extra $2,000 a year laying around, it works out to just $38.46 a week.
I was amazed to realize that 31 years had passed since I created this story. The stock market lived up to its historical returns — and then some. Many people have astonishing amounts in their IRA.
In 1990, it wasn't easy to start investing a small amount of money. In fact, only one mutual fund (which has since raised its minimums) provided that opportunity. But now it's easy.
You can “trade” for free — no commissions — at many major brokerage firms. You can start investing in individual stocks with just $1 at Robinhood. And if you work for a company that offers a 401(k) plan, just sign up.
But to get our student started on making a regular investment plan from her parttime earnings, I sent her to Acorns.com.
There you can start with as little as $3 per month and invest in one of five diversified portfolios designed by a Nobel laureate economist. There's even a “sustainability” portfolio, using ESG metrics to invest in socially responsible companies.
For a young person, Acorns will likely recommend its growth portfolio, taking the worry out of making investment decisions. And it will arrange for an automatic monthly contribution taken from a checking or savings account.
The icing on this cake is that you can enroll your credit cards and checking account for an automatic “round up” of your purchases to the next highest dollar. Those extra pennies are swept into your investment account when they total $5. It's painless and simple.
Since our student is working, I recommended that she make her account a Roth IRA, so the money could grow and compound tax free over the years for her retirement. I advised her to view the tab marked “Acorns Later” to do that.
I could hear her slight shock at my suggestion that she start to save for retirement at age 19. So I gave her the “kicker” line from that original investment story from more than 31 years ago: “If you invested that $2,000 a year in your IRA every year for 50 years, at that average 10.1% S&P 500 return, in 50 years your account would be worth nearly $2.5 million.” She would be age 71 then, just about ready to retire.
And that, my young friends, is the Savage Truth: Time is money!