Don't wait to start investing, says Suze Orman, personal finance expert and best-selling author of "Women & Money."
"The truth of the matter is, you should be investing more in your 20s than you do in your 30s if you can," she tells CNBC Make It. "The younger you are, compounding of money comes into effect."
She's referring to the power of compounding. In addition to earning money on your contributions, you also earn on returns on those returns over time. Because of this, your money grows exponentially. That means that if you invest a small amount and let it grow for decades, it will generally amount to much more than if you had invested a larger amount, but let it grow for a shorter period.
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 percent annual return. When that person retires at age 65, their investment will be worth just over $1 million. If the same person were to start investing $100 per month at age 35, they'd only have around $300,000 by the time they reached 65. "Those 10 years cost you $700,000," Orman points out.
However, all investments are risky and you're never guaranteed to earn a 12 percent rate of return. The S&P 500 index, for instance, has earned an annual average return of 9.8 percent over the past 90 years, and other indexes average even less. But even at lower rates, the difference starting at 25 and 35 is significant. Here's how much you'd earn with various rates of return if you invested $100 per month into a Roth IRA and retired at 65.
Starting at age 25: $196,000
Starting at age 35: $100,000
Starting at age 25: $335,000
Starting at age 35: $146,000
Starting at age 25: $584,000
Starting at age 35: $217,000
The more you invest, the wider the gap grows. Here's how much you'd earn with various rates of return if you invested $450 per month into a Roth IRA and retired at 65.
Starting at age 25: $885,000
Starting at age 35: $452,000
Starting at age 25: $1.5 million
Starting at age 35: $660,000
Starting at age 25: $2.6 million
Starting at age 35: $977,000
With retirement savings, starting early is the best thing you can do. "The younger you are, the more important it is to put as much money away as possible so that that money can compound and compound and compound," Orman says.
However, saving can be tough for young people who may earn low salaries or are burdened with student loans. And first and foremost, Orman recommends getting out of debt. But after that, it's crucial to make investing a priority.
To put it into perspective, "Every drink you go out to a bar and have, if you compounded that all the way out, it's not $10, $20," Orman says. "It could be $500 if you had just let it be in an account."
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