New to the workforce? Make your first paycheque work for you
Author: Edward Ruger
Source: The Motley Fool
It's been a hard year for everyone, but the recently graduated class of 2020 is facing a unique set of challenges. Due to rampant unemployment and a shaky recovery, those with little to no work experience have less control of their finances than ever before.
If you are employed during such an unstable time, investing is a critical tool to guide your financial future. Putting your money to work within the stock market regularly (starting with your first paycheque) allows you to take full advantage of compound interest and accumulate wealth. After all, your money should work for you, and not the other way around.
The S&P 500 has averaged a return of around 10% per year over the long term. That's great and all, but 10% doesn't sound like much when you're just starting out -- and it's not, at first. Unfortunately, 10% of a whole $10,000 is only $1,000 per year. Compound interest is incredibly powerful; however, it can be equally boring at the beginning. If you had invested that $10,000 just ten years ago into the S&P 500, you would be sitting on over $37,000. The only thing you'd have to do is reinvest the dividends.
However, chances are your first paycheque will not allow you to drop $10,000 into a portfolio to leave untouched. That's OK! In fact, even if you start investing just $84 per bi-weekly paycheque at a 10% annual return through a 40 year career, you'd be a millionaire. Those contributions over time add up to around $87,000. Ultimately, $913,000 of your million dollar portfolio is generated by investing early and letting compound interest do its thing.
Time in the market, not timing the market
The important part of investing a little of each paycheque is the frequency of it all. Through good times and bad, invest that portion of your pay. This type of investing is called dollar-cost averaging and it helps compound interest work its magic. If you dollar-cost average your investments you will sometimes buy high, sometimes buy low, but ultimately benefit from the upward trend of the market. Dollar-cost averaging can help investors remove emotion from their decision making and regularly build their wealth.
A small amount goes a very long way
If you're going to become a millionaire through investing, you'll need to invest habitually. Create this habit early in your career, and it'll be second nature to squirrel away a portion of your paycheque into the market. It is so much easier to invest regularly starting with your first paycheque than it is to play catch up years later. Since so much of compound interest's power comes in the later years of your investment, start now. That million dollars we calculated previously would "only" be worth around $600,000 if you waited five years to get started. However, if you started five years earlier, and have 45 years instead, that's more than $1,600,000. You can quickly see how investing more over a longer period of time can truly change your life.
A habit to last a lifetime
It's tempting to spend your first paycheque on an Xbox or a TV, but as long as you put away a portion of your pay toward investing, you still can! The incredible might of compound interest still works with small, but regular investments. You can put your money to work for you right now, and not have to forego the occasional splurge on what makes you happy. What matters most is to build the habit of investing today so you won't spend your later years missing out on your dreams.
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