- April 12, 2024
- Posted by: legaleseblogger
- Category: Related News
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Planning for Financial Independence at 22
At 22 years old, I recently had a conversation with my dad about investing and he shared some eye-opening insights with me. He explained that if I commit to investing $2,000 every month for the next 40 years, I could potentially become a multi-millionaire. The idea of having a few million dollars to my name in just 20 years seemed too good to be true, especially when he showed me the projections on an investment calculator.
With the power of compounding interest and smart investment choices, I could secure a comfortable financial future for myself. However, I also can’t help but feel a bit skeptical about the feasibility of this plan and whether it’s truly as attainable as it sounds. My dad emphasized the importance of starting early and not repeating his own financial mistakes, but I can’t shake off the feeling of doubt.
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With the assistance of AI Legalese Decoder, you can gain a better grasp of the investment concepts and strategies mentioned by your dad. This can help you assess the feasibility of his advice and make confident choices when it comes to managing your money. Don’t let confusion hold you back from securing a strong financial foundation for the years to come – leverage the power of AI Legalese Decoder to navigate the world of investments with ease.
Edit: Thank you to everyone who shared their thoughts and advice, reinforcing the importance of my father’s guidance. Wishing you all the best in your financial endeavors and overall well-being!
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You need to thank your dad, most people are not so fortunate to have someone in their life explain saving/investing early on and WHY it is so important
It’s not too good to be true.
The “trick” is that a lot of people don’t have the ability to put away $2,000 a month for 40 straight years — which works out to be $960k. Why? Because life is expensive… ill health and unemployment happen… because you want to save money for other really important goals (buying a house, a wedding/trip of a lifetime, having kids and paying daycare and childcare costs)… or you simply don’t have a job that pays you enough to live on *and* put away $2k/month.
It’s pure math. If you think it is too good to be true, just take some paper and a calculator to run the numbers year by year starting at year one (target a realistic interest, say 4-6%, and just do an annual additional contribution for simplicity rather than monthly). You will be surprised.
That said, the biggest issue is being realistic about your potential contributions. $2k a month is probably unrealistic for a most people.
After you resolve this, look at tax advantage accounts like 401k, IRA, Roth IRA, etc.
My father told me that it does not matter how much or how little you make, invest 10% of every paycheck. You will never worry if you will have enough when you retire. He was right. I started investing at age 20. I retired at age 58, and very comfortable.
Compound interest, mathematically, simply works. That’s inquestionable.
What you have to understand is that 40 years is A LOT OF TIME and you can’t predict the future. “Black swan” events do happen so you could suffer a market crash, a war, etc that might affect your investments.
However there is no such thing as gains without risk.
And as waiver_required mentioned, you need amazing discipline to achieve your target instead of cashing out too soon when you see that money starting to grow. At times you’ll feel that taking 2k out of your budget will be a hard sacrifice, that you could improve your standard of life with those 2k, that you could afford that trip or that car or that RTX GPU or whatever it is that you want and can’t… because you have the money but you’ve committed it to investing. I think this is the hardest part.
But yeah, if you can maintain the discipline and the world doesn’t take a left turn, you should be a multi millionaire in 40 years.
Your father is telling the truth, yet unfortunately the world falls short in educating people about personal finance. The market grows on average by 7-10% each year. However, there are a number of issues that people struggle with: (1) If the market is down, let’s say 20%, the worst thing that you can do is sell. You are better off holding out since the market grows on average by 7-10% each year. (2) Large investments will come up throughout your life. Budget wisely and allocate certain funds to be used toward your retirement.
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Even dads are right sometimes.
I assume the root of your question may be “if it’s this easy, why doesn’t everyone do it” and the unfortunate answer (even for those with the means to put away money each month) is that a lot of people aren’t taught this.
Time in the market is one of the best things to have on your side, take advantage of it!
Because there are people on the other side of the transaction borrowing money having the opposite effect.
So always pay off your credit card or you’ll discover the other side of ‘too good to be true’.
Also, have your dad redo the exercise factoring in inflation, because inflation has a role in why compound interest is a thing and why the millions in 40 years feels like a lot now, but will feel like a bit less then. Makes it even more important to save and invest.
Realistically most people are lucky if they can even save 200 a month for this. Living is hard.
It’s not too good to be true, but unfortunately it sounds too good and a lot of people don’t do it when they should.
It’s not too good to be true, but it does come with caveats.
First, is that you have the money to put $2k a month away. Actually, using a flat dollar amount is good for illustrating the point, but you should really be putting away a fixed percentage of your income. Inflation will eat away at that $2k over the course of 40 years.
Second, is that you have the stomach for it. The market will drop and you have to have enough faith in your strategy to not touch the money when that happens. As you get more and more saved, this could mean watching hundreds of thousands of dollars disappear from your account balance in a matter of weeks. That’s tough, and a lot of people panic and pull the money out, causing them to ultimately miss the recovery that could come on just as quickly.
Third, and I think biggest: We’re all basing future predictions on past performance. There’s a pervasive opinion that stocks will go up 10% (7% if you adjust for inflation) per year if you average it out over a long enough period. And that *should* happen. If there is an advantage to be had anywhere in society, a business should form around it to create value from that advantage, and those holding shares of that business should get a share of the value.
But the honest truth is if that ever stops, we’re all screwed. You have to get comfortable with that. It’s not unheard of for stock markets to go flat for decades, which would ruin a lot of people’s plans. The general idea is that whatever causes that is *probably* a big enough deal that how much one has saved for retirement will pale in comparison – on the order of the U.S. government collapsing, global nuclear war, Earth being hit by an asteroid like the one that killed the dinosaurs, etc.
Investing money is a bet that things like that *won’t* happen. And it’s a bet that has paid off for a century or two and there’s not really another bet that offers more certainty.
I prefer to refer to it as ‘compounding returns’ as in the return on your investment. I started investing 15% of my salary which was $17.5k at the time and continued to do this year in and year out until I retired. When I retired, just shy of 35 years later, I was making $125k. I retired at 56 with more than $5MM.
My company had a 6% 401k match which I took full advantage of.
Discipline yourself to save 15% of your earnings from day one, and invest that in equities in the stock market. Avoid debt and divorce. Live below your means. Buy good quality used cars. These are the hack. Ignore the Joneses and avoid lifestyle creep.
You now have the recipe to wealth. If you can maintain the discipline, which may take some sacrifice, you can become wealthy!
Forget compound interest, I want the secret to consistently having an extra $2k a month
Think of this way every 10000 dollars you invest into an investment which doubles every ten years will translate to an investment of 160000 at the age of 62. If you started saving at 50, You would have to invest 80000 to get the same results.
I started only at 26. Every year is important and the EARLIER you do it is better. EARLIER into diversified stocks ,
Remember invest early in your life. I say you target a certain percentage. Just put a portion of your paycheck as soon as you receive it into 401K, HSA and investments. That way you can pretend your actual paycheck is something else.
I have a very good job since 2019 and have been putting in a ludicrous investment of 150K every year into stocks. Those gains have created a value of close to 900K this month.
Imagine 900K at 30 which I am, dude my retirement is set at 60 if I leave this investment as is locked up. I can contribute literally nothing from today and might not be rich but would be decently set
Inflation also compounds. A million in 30 years is worth a lot less than it is right now. Still 7-8% compounds a lot more impressive than 2-3% of course.
theres some degree of argument that exponential growth relies on continued rapid technological advancement alongside population growth and that advancement may stagnate at some point, or at least decline. you can kinda see what happens when some companies hit a ceiling on growth and what happens when they continue to chase that compounding growth on an ever increasing market cap.
Okay here’s how compounding works, I’m gonna use way bigger numbers than are realistic to make the point faster, IRL this is a process that takes years and decades
You have $100, you put it in the bank. The bank is going to give you 10% interest per month on it.
After a month, you have $110, the original hundred plus the $10 from the interest
The next month you have $121, you got $11 in interest this time because you had $110 in the bank, not just $100
Month 3 you have $133.10
Month 4 you have $146.41
Month 5 you have $161.05
Month 6 you have $177.16
So in the 6th month, you got $16.11 in new interest from your deposit, compared to the $10 in the first month. So not only is your total sum growing ($100 to $177) but also the rate of growth is accelerating ($10/month to $16/month).
This same principle also applies to stocks, though it works in a bit of a different way. Theoretically the value of shares you buy grows over time, so as you own more, your growth potential also increases. Starting early is pretty much always a great idea, listen to your dad
It’s FORTY years and it’s $2000 a month.
You are not getting rich overnight and for free.
40 years is a really long time and the majority of people can’t do it.
The catch is having an extra $2000 every month at 22. At 22 I think I was making like 15 grand per year as a graduate teaching assistant.
As someone who has been savings 2k ish a month and investing it, take it from me compounding interest is insane. I’m at the point already where compounding is already almost 10k a year.
At your age every dollar has the potential to turn into 66 dollars in retirement. That’s assuming 10% returns and waiting till 65
The only part “too good to be true” is finding an extra $2000/mo to put in savings.
The big deal is finding an extra $2,000 a month to invest.
For many people, investing 2000 a month is straight up impossible. But if you are able to start investing 2000 a month at age 22 and continue until you are 62, then yes, barring major catastrophe that requires you to use some of the savings, you will be very well off at 62.
It’s true. But inflation compounds as well, so these numbers that sound huge won’t be as big in the future.
Life’s about to hit you with how hard it is to consistently invest $2k/month
It’s not too good to be true, and it’s literally one of the biggest societal blind spots there is in terms of just going about your daily life. Consider yourself lucky that it’s been brought to your attention and don’t ignore it.
People often do end up getting some degree of education when it comes to interest but in the form of loans and how/when they get fucked by it, but tons of people go through their entire lives not ever realizing how much it can work for them.
You know what else compounds the same way? Inflation.
So yeah, in 20 years you’re gonna have a lot more money, but that nominal amount is gonna have less purchasing power than it would right now. So in real terms you’re only winning the difference between that interest rate and inflation, so it’s less than you think.
2000 a month on paper seems easy, 2000 a month in practice is 24k dollars.
You guys have 2000 dollars to spare at the end of every month?
The other trick is that the government gives your $23000 and $7000 in tax incentives to do this.
So fill up your retirement accounts first and stop paying the government!
You talk like investing $2k / month for 40 years sounds easy.
Its *technically* too good to be true..
I mean you are basically betting that the government will never collapse and stocks will continue to go up forever..
But eventually the government will collapse and your investments will mean absolutely nothing.
But here’s the cool part: If the government collapses, no money matters!
I feel like people forget to remember to live their lives as well. None of us are guaranteed life tomorrow so why waste putting all your extra cash into savings/investments instead of going out and enjoying certain human experiences that require spending.
Not saying you shouldn’t save at all, but saving to live frugally and limit your want of nice things isn’t a way id like to live.
You don’t really have any conception of how much 2k per month is. That amount of money would be pretty ridiculous to save for anybody making under 6 figures who also is LIVING LIFE. I.e., wife, kids, house, car, etc.
Yes, you can “make millions” in this manner. But as you get older you’ll realize that it’s probably better to just live your life and save as much as you can, rather than sacrifice life now to get retirement early. After all, who knows if you’ll even make it to retirement? Life is unpredictable
Inflation adjusted compound interest is what you want. Then it no longer sounds too good to be true.
Well couple obvious things there,
1. You need an income and lifestyle allowing for 2000$ extra every month to invest.
2. The investments will also need to succeed as expected.
3. Other bad things like debt, and student loans also get to abuse compounding interest…
2,000 a month is a hell of a lot of money for most people
Very early on in my career my company told us about this. Also, when the stock market goes down, you’re buying cheap stock, so don’t panic. If you’re under ~50 don’t worry about the market going down. You have more than enough time for it to come back up. In your 401k put in at LEAST the amount your company will match.
I did this and will be able to retire early.
Interest and inflation, you have to subtract them. Besides that, it’s just math.
If you’re getting ~3% from a savings account, sure you can double your money in 24 years. But if inflation is 4%, prices double in 18 years. So you really get -1% per year.
Something that’s always been crazy to me was my grandparents buying their house, and selling it for almost 50x what they paid for it. But when I calculated that as a yearly return, that was ~6% per year. And sadly, the price of everything has about 50x as well, so I’m not sure how far ahead they are really.
A million dollars sounds like a lot today, in 40 years it won’t be much.
But still, saving is important, and compound interest is important, just subtract what inflation is to get the real % returns.
$2,000 x 12 months x 40 years is $960,000.
$2,000 x 12 months x 40 years x 2.4% APY Interest Accruing Savings compounded monthly = $1,614,000
$2,000 x 12 months x 40 years x 5.0% APY High Interest Savings compounded monthly = $3,066,000
$2,000 x 12 months x 40 years x 10% APY Investment account compounded monthly = $12,755,000
Which sounds like a lot, yea? But let’s account for a steady, hypothetical 3% of annual inflation. Your buying power forty years from now would be approximately 60% of what it is today, dollar for dollar. So $960,000 has the buying power of $564,000 (you’ve lost buying power.) $1,614,000 would have the buying power of $952,000 (you’ve just about kept pace with inflation.) $3,066,000 would have the buying power of $1,809,000 (you’ve gained buying power.) $12,755,000 would have the buying power of $7,525,000 (you’ve gained a lot of buying power).
The thing is, if you save that money, *that money is not directly contributing to your quality of life*. And $2,000 a month is not a small sum. 25% of US earners make that much a year. The average American earns $60,000 a year. Giving up 40% of your income for savings is a big step-down in quality of life. It’s money that you can’t use for housing, transportation, groceries, or leisure.
Compound interest is not magic. It’s money you’re giving up access to right now so that somebody else can use it to invest themselves. And having access to that money is not an insignificant consideration.
If youre saving 20 percent of your income, you have to make 120k a year to put away 2000 a month. Most people dont make 120k a year, and most people dont put away 20 percent of their income.
The math is good, but it’s also only attainable for a minority of investors.
Just wait until you find out how difficult it is to save $2000/month when living on your own.
The more you invest now, the better. It has far longer to grow and multiply.
I was just looking at some paperwork for an investment account I made in my early 20s. I initially invested a low amount, between 250-500 a month, for several years. In total, that account has had approx $40k invested into it. It currently has a balance of around $55k. And over the years, I have withdrawn around $60k. So, from my total investment of 40k, it has nearly tripled, and continues to grow, even though I have withdrawn my initial investment plus some, over time.
I wish younger me would have been more aggressive, but I’m thankful that i’ve done at least something at 20.
It doesnt have to be $2,000/mo….and it SURELY doesnt have to be for 40 years. Try even $200 a month, from age 20-30. The key is starting it when you are SUPER young, and let time do its thing.
Be a Jack: [How Teens Can Become Millionaires – Ramsey (ramseysolutions.com)](https://www.ramseysolutions.com/retirement/how-teens-can-become-millionaires)