The single most effective way to get rich
Kathleen Elkins, www.businessinsider.com
Contrary to popular belief, you don’t have to be an expert about personal finance to get rich.
You don’t need to use fancy economic jargon or know this year’s „hottest stock.” You don’t have to come from an affluent family, and you don’t even have to earn a massive paycheck.
For most people, it all boils down to one thing: investing.
„On average, millionaires invest 20% of their household income each year. Their wealth isn’t measured by the amount they make each year, but by how they’ve saved and invested over time,” writes Ramit Sethi in his New York Times bestseller, „I Will Teach You To Be Rich.”
„In other words, a project manager could earn $50,000 per year and be richer than a doctor earning $250,000 per year — if the project manager has a higher net worth by saving and investing more over time.”
Sethi gives an example of the power of investing just $10 per week:
After five years (assuming an average 8% return), you would have $3,295, and after 10 years, you would have $8,136. And that comes from simply setting aside a little over a dollar a day.
Putting away $50 a week would result in $16,473 after five years and $40,678 after 10 years. Imagine how much money would accumulate if you set aside a bit more each week, and did that for several years.
The earlier you start, the better.
This chart from JP Morgan Asset Management, which shows the power of taking advantage of compound interest from an early age, explains why it’s so important to get started now and invest consistently, even if you think you don’t have enough money to make a difference:
You don’t need to be rich to invest, yet so many of us fail to get started managing our money because we’re intimidated or don’t know where to start. Fear of losing money is also a common concern: „That’s fair,” writes Sethi, „Especially after market losses during the global financial crisis, but you need to take a long-term view. Despite wild rides in the stock market, with a long term perspective, the best thing you can do is start investing early.”
Investing is not as complicated or daunting as we make it out to be. The simplest starting point is to invest in your employer’s 401(k) plan; make sure to take full advantage of your company’s 401(k) match if they offer one.
Next, consider contributing money towards a Roth IRA or traditional IRA, individual retirement accounts with different contribution limits and tax structures (which one you can use depends on your income). If you still have money left over and are hungry to continue investing, you can research low-cost index funds, which Warren Buffett recommends, and look into the online investment platforms known as „robo-advisers.”