The following is a guest post from someone experienced in both sides of the investment coin: Patrick Mackaronis. Patrick got his start as a high-stakes trader and serial entrepreneur, eventually pivoting into a powerful career as a co-founder and director of business development for social media startup Brabble in bustling New York City.
A 401k can easily make millionaires out of mere mortals. By investing small amounts in regular intervals (like a percentage of each paycheck) beginning in your early to mid 20’s, your savings can expand tax-free for 40 or more years. Sadly, a lot of people veer towards procrastination, as they find themselves focused on bills due or purchases at the forefront of their mind. As adults, we are inherently terrible at comprehending the concepts of events decades in the future. Luckily, in regards to investments, time is on your side in a big way if you start earlier.
HIGHER CONTRIBUTION AMOUNTS THROUGH THE COFFEE CONCEPT
Small impressions leave large impacts. Think of it as the Coffee Concept. The smaller, less consequential things we purchase on a regular basis over time will add up to a surprisingly large sum. Do you spend $3 on a specialty coffee every morning from your local coffee shop? Do that five times a week for 50 weeks a year for twenty years, and you’ve spent $15,000 on coffee. Instead, make 401k contributions your vice, contributing an additional amount equal to this coffee, and making your own cup at home.
You will be pleasantly surprised how these trivial amounts can add up over the years, and even more impressed at the accumulation as years turn into decades. Three dollars, compounded annually for forty years, is $135.78. The power of compound interest over time is incredible.
NOT TAKING ADVANTAGE OF EMPLOYER MATCH IS LIKE THROWING AWAY FREE MONEY
If I handed you $250, and told you that I would keep handing you $250 every two weeks, with the only stipulation being that you had to hide $250 of your own money every time, would you do it? If you’re making $5,000 per month before taxes and your employer has a 5% 401k match that you aren’t taking advantage of, you are literally saying no to that proposal. An alarming percentage of Americans are failing to take advantage of the concept of the employer match on 401k’s. Latest polls show that over one third of working-class professionals in the United States have nothing saved for retirement at all!
Contribution matching from your employer is as close to free money as it gets, guaranteed investment returns at 100% that skyrocket your own contributions. If you are investing early, this adds up so much over time that it can be mind-blowing. Don’t leave the offer of free cash on the table.
COMPOUND INTEREST: YOUR NEW BEST FRIEND
Want to know the secret to creating personal wealth? Its name is compound interest, and it is an investor’s best friend and secret weapon when it comes to turning money into more money. People tend to not get too excited about compound interest. This rings even more true with interest rates at all-time lows. The truth is, compound interest is the secret formula to bust through those low interest numbers into the stratosphere.
Let’s say you are saving $600 each month. That’s $7,200 in one year. But over time your money is growing as you invest it each month. Once you hit year two, an increase of five percent makes the $7,200 worth $7,560. This, in combination with continuous contributions and appreciation of capital, causes exponential growth as time passes.
INVEST EARLY TO INVEST MORE
The Coffee Concept shows how tiny savings on a regular basis leads to massive growth on a large timeline. Employer matches are literally free money being offered by your employer. And compound interest is the secret to wealth creation that is yet another bonus of investing often and investing early. If you are in your 20’s and you have not yet begun taking advantage of the benefits of 401k investment, now is the second best time to start (the best time being earlier).
Patrick Mackaronis is a veteran of the startup and investing scene in the Big Apple. He can be contacted via Twitter at @patty__mack.