after a few years of thinking about investing, I decided to start. It's easy!! Accounting is pretty boring IMHO, but this stuff is fascinating!
For example, here's a little riddle..
2 brothers (Bill & Bob), age 20, each have an extra $3,000 a year to do with as they choose.
for the first 6 years Bill invests his $3,000, and Bob spends his on clothes, CDs, cars, etc. In the 7th year, Bill stops adding money, after putting $18,000 into the fund. For the next 29 years, he spends the $3,000 a year however he chooses.
By the 7th year, Bob decides to start investing, and for the next 29 years he puts the $3,000 each year into his own mutual fund, with the same rate of return, with a total of $87,000 invested.
Always great to be employed and have a really good 401k plan. IRA accounts are also a sure thing. With my formula above, you can plan on becoming millionaires in no time, however, you can't touch the money you invest, until you reach your year goal, unless you want to pay a hefty penalty of about 30%. Best wishes!
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07:04 PM
kempo Member
Posts: 578 From: Sterling, Virginia, USA Registered: Jul 2001
Oh yeah- Bob has absolutely no chance in hell to catch up to Bill. Bob could put in $10,000 per year for the rest of his life and never catch up to Bill.
This is not always the case, because nothing is constant. If Bill invested during good times, and Bob started during a downturn, and both invested in stocks, then Bob can catch up and even surpass Bill.
Bill may have invested in stock mutual funds which, at the time, were paying $10.00 per share (average), but, when Bob started his investing, his stock fund could have been paying $4.00 per share.
Another assumption, but if bost stocks later rose in value equally, then Bob may now or soon own more shares than Bill, and, therefore, his net worth may be equal or higher.
Both should benefit, though, during the time that they are actually investing via "dollar cost averaging" aka the fact that if you are continuously purchasing stocks in the long term, the high prices you pay will be leveled by the lower prices you pay. In the long term, the stock market has a lifetime return rate of 12%.
Originally posted by Loki: But Bill stopped putting money in after 6 years. Bob put money in for 29 years...What am I missing?????????
Year 1: Bill: $3K +14% "Interest" = $3420.00 Bob = $0
Y2: Bill: $6420 + 14% = $7319.00 Bob: $0
Y3: Bill: $10,319 + 14% = $11,164.00 Bob: $0
Y4: Bill: $14,164 + 14% = 16,147.00 Bob: $0
Y5: Bill: $19,147 + 14% = $21,828.00 Bob: $0
Y6: Bill: $24,828 + 14% = $28,304.00 Bob: $0
Y7: Bill: $31,304 + 14% = $39,107.00 Bob: $0
Now, starting at Year 8, Bob is starting where Bill was seven years ago, and Bill is making $5475.00 per year (to start) in interest. Bob will catch up, but not in time to retire.
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03:07 PM
Old Lar Member
Posts: 13797 From: Palm Bay, Florida Registered: Nov 1999
What you are missing is that it is better to start investing for retirement at a very early age and don't touch it for any reason except for retirement. I repeat, don't touch it. That is why a 401K or IRA is a good idea. It makes it difficult for you to get your hands on the money.
The rule of 72. Take the interest rate you make and divide it into 72. That is how many years it takes your money to double.
At a return of 10%, that money will double in 7.2 years. So you put $1000 away in 28.8 years it will be worth $16000. In 36 years it would be worth $32000.
The stock market historically has made about a 10% return over the long haul. Some years better (Mid 90's +30%, 2000 lost -10%). So you set up a diverse asset allocation, to take advantage of the growth, and limit the losses.
Don't go trying to play the market with market timing, set goals as to acceptable gains and losses. Mutual funds are a better route to go, a plan manager makes the decision with many stocks in the plan.
