This is mostly for the young'ins, but applies to all. This post has been on my mind for months, but I finally got motivated to throw it up after reading the "I have no cash and no credit but I'm going to buy a 30D" post.
For those of you that do not make money with your photography (like me), or who try to make money but don't actually make enough to cover the cost of their equipment ... let me throw some numbers your way.
If you're 18 years old, you have $2K in cash and a 300D ... you could spend that money on a 30D + lens or you could invest it. Let's assume you put that $2K in a simple index fund that returned an annualized 8% after expenses until you retired at 65 ... and let's assume that you never invested another DIME until your retirement. You'd have $68,948.17 in your account.
Be a little more diligent and invest $200 a month, or $2400 a year starting at the same age and getting the same return ... you'll retire with $1,086,960.37 ... yes, you read that number correctly. Let's say you make good investment choices by staying on top of the market and taking a little time each week to do some research on your own holdings ... instead of 8% you return 10% ... your nest egg is now worth $2,092,739.65
Remember, this is on $200 a month. Up the antee to $500 a month and you'll sit back in the Bahamas with a smile-bringing $5,231,849.12 in your account on that same 10% return.
Age is the key here. Time is your friend because in all of this, by the 8th year of investing, your annual return on your investment is actually adding more to your account than you are. In the 30th year of your investing, your annual return added almost $99K to your account ... much better than the $6K you added with your $500 a month. By the time you retire, the annual return on your investments is $475,077.19. If you manage to only spend $475K a year, you will get rewarded with the same amount until you die. Theoretically, more on that soon.
But ... like I said, age is the key. Blow your money when you're a kid and think, "I'll start investing next year, I want to have fun, I'm only young once" ... and the effect is nasty. Remember that $5.2mm return on $500 monthly returning 10% starting at 18 and ending at 65? That cools to a svelt $1.6mm if you start at age 30 instead of age 18.
And don't think that you don't "need" that much money when you retire ... you'll do fine on less. While the idea of returning 8 or 10% annually AFTER you retire is a nice one, the reality is that as you approach retirement age and your nest egg has grown, a down market can wreak havoc on your net worth so sensible people will move farther and farther away from stocks (higher returns) and on into bonds and fixed-return investments like the good old certificate of deposit. So the reality is that as you spend your retirement money, your nest gets smaller.
Will your nest egg need to last you until you're 103? With tomorrow's medicine, who knows? Maybe it only needs to last you until you're 70 ... maybe you have a stress induced heart attack before you're 45. There are a lot of unknowns, but the LAST thing you want to do is have to move into some low-income retirement home. For those of you who are young ... your grandparents had it EASY. More than likely they had jobs that provided them with a pension, they had a government that kinda worked and provided Social Security.
You don't have that. You have nothing. I work for one of the top 3 largest financial institutions in the world and as of last year, there are no more pensions for new hires. Our Social Security system is a joke, it will probably no longer exist in 10 years. If you don't do something about your future, and NOW, you will not retire. It's easy to say, "No biggie, if I can't afford to retire at 65, I'll just work until I die". See how you feel about that when you're 67, your arthritis is so bad it hurts to hold your morning cup of cofee, you've already had a hip replaced, and every now and again you get a hernia for doing little more than picking up your 20-pound grandson. Is that a grim picture .. yes, but how many people do you know that are 70 years old and functioning perfectly?
There are some rich people on these forums, I mean that seriously. What I also notice, is that there are a lot of people who spend a lot more than they should. For those of you that are young and have some money, or worse, some credit ... think about how you're going to feel when you've worked your arse off for 40 years and when you finally retire, you don't have enough money to travel or enjoy the things in life you always wanted to enjoy. My grandmother sits in her apartment 6 days a week until one of her kids comes and takes her out to food shop and get some lunch/dinner. She goes on 1 cruise a year if she's lucky ... she hasn't enough money to do any more. Don't be her.
For anyone that doesn't know the first thing about investing and wants a short tutorial or has some specific questions ... throw me a PM, I'll be happy to answer. I will not give specific stock advice, but I'll try to show you some of the options that are available to you.
Bill
) I would like to talk finances with you sometime soon.
