By Emmie Martin
“The key to your financial freedom in the future is investing when you are young,” Suze Orman, personal finance expert, best-selling author of“Women & Money” and host of the “Women and Money” podcast, tells CNBC Make It.
“I would much rather see you invest a specific amount of money when you are young, a lesser amount of money, than waiting and have to invest five or six times [as much] when you are older,” she says.
That’s because with compound interest, any interest accrued then earns interest on itself. So the earlier you start, the more your money will grow.
Orman gives the example of a 25-year-old who invests $100 a month in a Roth IRA for 40 years and earns a 12% average annual return. When that person retires at age 65, their investment will be worth just over $1 million.
But not everyone starts putting money away in their 20s. “You think, ‘I don’t have to invest, I’m young,’” Orman says.
If you start investing $100 per month at age 35, though, you’d only have around $300,000 by the time you reach age 65. “Those 10 years just cost you $700,000,” Orman points out.
“How much would you have to be investing later on to make up for that?” she says. “Hundreds and hundreds and hundreds of dollars a month.”
It is worth noting that all investments are risky and you’re never guaranteed to earn a 12% rate of return. The S&P 500 index, for instance, has earned an annual average return of 9.8% over the past 90 years, and other indexes average even less. But even at lower rates of return, the difference between starting at 25 and 35 is significant.
Here’s about how much you’d earn with various average annual rates of return if you invest $100 per month into a Roth IRA and retire at 65.
With a 6% rate of return
Starting at age 25: $196,000
Starting at age 35: $100,000
With an 8% rate of return
Starting at age 25: $335,000
Starting at age 35: $146,000
With a 10% rate of return
Starting at age 25: $584,000
Starting at age 35: $217,000
“The key isn’t the amount, the key is the time,” Orman says. So, even if you can only contribute $50 a month, do “whatever you can do.”
There are several easy ways to get started. The simplest choice is to contribute to an employer-sponsored 401(k) plan, especially if you’re offered a match, which is essentially free money.
If your company doesn’t offer a 401(k), you can look into other tax-advantaged retirement savings accounts, such as a Roth IRA, a traditional IRA or a SEP IRA.
Outside of retirement accounts, many experts, including Warren Buffett, recommend investing in low-cost index funds, which allow you to own a small piece of many different companies. You can curate a mix of funds yourself or use a robo-advisor, which does the work for you.
This article first appeared on CNBC https://www.cnbc.com/2019/05/10/suze-orman-why-you-should-start-investing-in-your-20s.html and is republished with its permission.