Are You Saving Enough Money?
Look, let's not overthink this. Money may not buy you happiness, but it sure is great for everything else. And the more of it you have come your later years – you know, after you retire but before you die – the better chance those years look like the lifestyles of the men and women who live inside vitamin commercials.
Maybe you're thinking: But I'm young, I have no money. Yes, but you do have time. And time, in the investment world, really does equal money. Follow the advice of Josh Brown, financial adviser and the CEO of Ritholtz Wealth Management, and rest easy: As life drags on and you accrue wrinkles and joint pain, your money will slowly grow, going from a modest nest egg to a full-blown vitamin ad.
First (three) things first.
Step 1: Pay off your credit cards every month.
Step 2: Build an emergency fund. "You want to try to save three months' salary [if you're] in your 20s," advises Brown. "What that gives you is optionality, so if someone is like, 'Hey, come join my start-up. I'm going to give you equity, but it's going to be a month before I can pay you because I haven't set up the payroll,' and [you're like], 'I'd love to do it, but I've got bills this month,' you might be giving up the opportunity of a lifetime."
Step 3: Max out your retirement fund before investing in anything else. "If you have a retirement fund and you can go up to $17-18,000, you shouldn't go up to $10,000 and then start investing in a different account. That is the best bang for your buck."
And if that's all you can do...that's fine!
"For someone in their 20s, it's impossible to imagine retirement. Nor should they!" Brown implores. "Your readers will worry, 'Oh my, I read GQ. I want to buy all of those clothes in there! I want to try those eight ski trips next year.' I don't think people should be beating themselves up if they go through 25, 26, 27 and don't save any money. As long as they're moving forward in their career, that's way more important."
But if you do all of that and have some left over...start with The Rule of 72.
The Rule of 72 allows you to determine how many years it'll take to double an initial investment. All you have to do is divide 72 by your expected rate of return. (Prepare for math!) If you invest $10,000 in a bond whose annual return is 10 percent, take 72, divide it by 10 (the rate of return), and you'll see it'll take about 7 years (72 divided by 10 = close to 7) to turn 10K into another 10K. And yes, that's a lot of numbers. But more than anything, the main takeaway is this: It doesn't take that long to double your money! Obviously, in the stock market, you can't know what the rate of return will be (unless you're Christian Bale in The Big Short), but historically, over time, the return is about 7 percent. Applying the Rule of 72, that means if you put a lump sum into the market today, in just a decade, your money will have doubled [(72 divided by 7 (average rate of return) = 10 (years)]. In another decade, it'll double again.
And that's just your initial investment. It doesn't take into account all the other money you may invest along the way. Your money is like a snowball rolling downhill, except in addition to picking up all the snow on the ground, you're standing next to it throwing even more snow (a.k.a. money) onto it, which, in turn, adds more snow (a.k.a. compounded interest) from the ground until, eventually, it turns into...Warren Buffett.
Also, don't copy your dad: "Your dad's probably watching me talk on TV about trading Nvidia and Facebook stock. Understand that you have time on your side."
If you're young and you think, 'I have plenty of time in the future to invest,' maybe think again.
"Here's your choice," says Brown. "You can be invested very conservatively now, have a lot of cash, sleep well at night, and never have to worry about market volatility. The problem with doing that is, at 70, you can't afford to earn any more because no one wants to hire you. And you don't have any more time to compound. You thought you were doing the conservative, right thing to do. [But] you did the most reckless thing, which was: prioritize your feelings today, and cost yourself money in retirement. Here's the flip side and what people should do: Take your risk now. That way when you're older, you don't have to take any additional risk because you've already spent decades compounding. So if you think about it, being as fully invested toward volatile, risky assets today is the conservative thing to do."
(Unless, Brown says, "you're planning on dying at 40. In which case, you'll be fine.")
"All of the things that helped the human animal survive for hundreds of thousands of years, the qualities that made us what we are today as a species, work against us in the financial markets," says Brown. If you're here right now, reading this, it's probably because your Homo sapiens grandpa was smart enough to run from the campfire when it was charged by a woolly mammoth. That fight-or-flight instinct makes us risk-averse, so that we react to another really bad Under Armour earnings report in the same way we once responded to a hungry woolly mammoth. "We hear a loud sound, somebody screaming, 'The stock market's going to crash!' or a big company goes bankrupt. It's in our instinct to react to it," continues Brown. "I think most people need to be mindful of that moment when they're feeling panic and things look terrible – that's when a great investor thinks about getting aggressive."
Consider the following.
Over any 20-year period since 1926, the S&P 500 has never returned a loss. Meaning: If you have 20 years to let your money sit, chances are (very, very high) that you'll come out with more of it. Increasing your holding period is the surest way of compounding your money.
And if you are young and you do invest wisely, here's your worst-case scenario.
"You make it all the way to 65, you quit your job or sell your business, and then you sit down with your financial planner and you're like, 'This is my monthly expenditure; these are my taxes, my health-care costs; this is what we think inflation is going to be; so how does that look?' And the financial planner runs all these calculations and is like, 'Turns out you're not spending enough money. Either that, or you've got to find a charity.' Would that be the worst thing that ever happened to you?"