Before wealth manager and author David Bach made his first million, he was a brand new financial advisor in his early twenties, he tells CNBC Make It: “We had someone come and talk to our training class, and as he walked out the door, he handed us this chart.”
Ultimately, the chart “changed my life,” Bach says.
The chart shows two different scenarios:
- You start investing at 19 and contribute $2,000 to your account every year until you reach 27. From 27 to 65, you contribute $0.
- From 19 to 26, you don’t invest anything. You start investing at 27 and contribute $2,000 to your account every year until you turn 65.
In the first scenario, you’re only saving and investing for eight years; in the second, you’re saving and investing for 39 years. Still, the person who starts at age 19 would end up with more money in their portfolio in the long run.
Assuming a 10% rate of return, the first person would have $1.02 million by 65, while the second person would have $805,185, a difference of more than $200,000.
As the chart shows, the sooner you can start putting your money to work, the more you’ll benefit from compound interest and the less you’ll have to save to reach your retirement goals.
In terms of where to set aside your dollars, “You have to have this money invested for growth,” Bach says. “You cannot put this money in a money market account or a CD, where it grows at 1% or 2%. You’ll never build wealth.” Instead, Bach recommends putting your money to work in a tax-advantaged retirement account, such as a 401(k), Roth IRA or traditional IRA, where it will grow over time.
Retirement-specific accounts offer tax benefits, but there are other ways to invest your money: You can look into low-cost index funds, which Warren Buffett recommends, and online investment platforms, such as Ellevest or Betterment, known as robo-advisors.
No matter how you choose to invest, the most important step is to open at least one account and start contributing to it consistently.
“Start investing today,” says Bach. “Because the miracle of compound interest starts working the day you put it in place — but the key to compound interest is that it takes decades. It doesn’t get done in days. When you try to get rich quickly, you stay poor forever. This is about building wealth for your lifetime.”
This article first appeared on CNBC https://www.cnbc.com/2019/07/08/self-made-millionaire-david-bach-a-chart-changed-the-way-i-think-about-money.html and is republished with its permission.