Making mistakes is a part of life and it happens to the best of us. As long as you learn from your mistakes, you will be just fine. But do you want to know what’s better than learning from your mistakes? Learning from someone else’s! So today I want to share will you all a financial mistake that has cost me over $100,000. Yes, that’s right a $100,000! My goal with this post is that you learn from my mistakes so that you never have to make this mistake on your own. So without further ado, let’s discuss my $100,000 blunder
MY MISTAKE
I graduated college at 22 years old and began my working career shortly after. During my first three years of employment, I focused all my excess cash on paying down the credit card debt I’d accumulated during college and building my emergency fund. Once that was completed, I had plenty of excess cash flow but didn’t know exactly what to do with it. I was contributing to my company’s 401k up to the match but then still had extra money after that. I knew that after contributing to your 401k match, the next best step would be to fully fund a Roth IRA which is $5,500 per year. However, my thoughts were, “why not enjoy this extra money today, I can always fund a Roth IRA later in life and it’ll have the same outcome.” Now, this is where my logic was drastically mistaken. And the unfortunate part is, this is the logic for many Millennials in this same situation. We often think that waiting a few years to being investing can’t do us much harm but, actually, it can cost us thousands (over $100,000 per year if you want to be exact). By postponing my Roth IRA contributions for one year, I cost myself $110,680 in future earnings! How is this possible you ask? Well, let’s take a more in-depth look.
COMPOUND INTEREST
So you may have heard about this term compound interest. In fact, Albert Einstein calls it “The most powerful force in the universe.” But how does it work? Well, I don’t want to dive into the weeds during this post but just know this formula (compound interest x time = tremendous growth). The longer time that an investment has to compound, the larger it will grow. This means that the earlier you start investing, the more time your money will have to grow and by an exponential amount. Still not too clear? Well let’s look at 3 scenarios:
1) In this scenario we decide to begin maxing out our Roth IRA at 25
Age 25
8% return
40-year period
$5,500 per year (Invested capital= $225,000)
Account Balance at 65 = $1,658,281 (86% of this growth comes from compound interest)
2) In this scenario we decide to postpone maxing out our Roth IRA until 30
Age 30
8% return
35-year period
$5,500 per year (Invested capital= $198,000)
Account Balance at 65 = $1,104,881 (82% of this growth comes from compound interest) Due to 5 years of waiting ($553,400 less)
Each year cost you $110,680
3) In this scenario we decide to postpone maxing out our Roth IRA until 35
Age 35
8% return
30 year period
$5,500 per year (Invested capital= $170,500)
Account Balance at 65 = $728,247 payout (76% of this comes from compound interest)
Due to 10 years of waiting ($903,034)
Each year cost your ($93,000)
As you can see from our scenarios waiting to invest is expensive! By waiting just 5 years to begin investing, we noticed a $553,400 ($110k per year) decrease in our ending balance. And by waiting 10 years to begin investing, we noticed a $903,034 (900k per year) decrease in our ending balance. How is this possible? When it comes to compound interest, time is the most important factor and the early years make the most difference.
TAKEAWAY
The moral of the story is this, waiting 1 year to max out my Roth IRA (when I clearly had the funds) cost me over $100,000 in future earnings. This is money that “in theory” that I cannot get back. The really sad part is, I can’t even tell you what I did with that $5,500 I decided not to invest! I can tell you one thing for sure, whatever I bought won’t have a future value of $100k. Again, the goal of this post is not to persuade you to invest every dime you have and never enjoy your money today. The goal is to merely inform you of what you would be forfeiting if you decide not to invest in something and use your money for consumer based desires.