Investing is often heralded as a crucial path to building wealth, but bridging the gap between investing small amounts, such as $20 per paycheck, and achieving a comfortable retirement after 30 years can seem daunting. Does it really work, and how do you begin? In my journey, it’s somewhat akin to following an intricate skincare routine and having faith that those small blemishes will vanish overnight. While I’m still waiting for the full magic of my skincare regimen, I can attest that investing is indeed a magical journey that yields results over time.
I embarked on my investing journey at the age of 20, thanks to a small one-time government grant I received due to living with a chronic illness. This grant came with a condition that it must be invested until my retirement age. In essence, it was a form of forced investment. Prior to this, I possessed theoretical knowledge of investing but had never ventured into it. Suddenly, I had to visit the bank, open an investment account, and determine how to make the best use of this money, which was quite intimidating. I delved into books, conducted some preliminary research on exchange-traded funds (ETFs), and took the plunge. Nearly a decade later, that initial investment has grown into a six-figure nest egg, all without a significant increase in salary or inheritance. Here’s a guide on how I achieved this, and how you can too.
Select the Right Account for You
The first choice I encountered when visiting the bank was the type of investment account I wanted to open. Several options are available, some offering tax benefits, such as tax refunds when you file your taxes or tax-free withdrawals in the future. These are the typical 401(k) and Roth IRA accounts, with annual contribution limits. On the other hand, there are non-tax-sheltered accounts that allow you to invest as much as you wish, but you’ll be taxed on your gains. I opted for a tax-sheltered account because I knew I wouldn’t be maxing out the annual contribution limit anytime soon. It provided peace of mind, knowing that I wouldn’t have to worry about paying taxes on my investments in the foreseeable future.
I also considered where I wanted to invest my money. Initially, I chose an account linked to my bank, the same one my parents had used for years. However, after a few years, I decided to transfer my funds to an online investment platform with lower fees. It’s important to keep an eye on these fees because even a 2% fee can erode your investments over time. I recommend seeking options with fees of 0.5% or lower to maximize your returns.
Choose the Right Investments
After setting up my account and depositing my money, the next step was to decide where to invest. Initially, I was inclined towards mutual funds because they seemed secure, managed by professionals, and relatively hands-off. However, after conducting research, I realized that I could manage my investments, so I opted for purchasing various ETFs. ETFs offer natural diversification as they contain shares from numerous companies, and they have a historically strong performance record. Opting for ETFs, rather than high-fee mutual funds or individual stocks, proved to be a prudent decision because it kept my costs low and eliminated the need for constant buying and selling.
In addition to ETFs, I allocated a portion of my portfolio to a managed investment platform offered through my workplace. The primary decision here revolved around the level of risk I was willing to assume. Safer investments pose lower risks but offer lower rewards, whereas riskier investments carry the potential for higher returns over time, albeit with increased risk. As a young investor with a long investment horizon—roughly 30 years until retirement—I could afford to take on more risk and ride out market fluctuations, which is what I chose to do. Numerous online calculators can help determine your risk tolerance, but being less conservative as a young investor enabled me to accelerate my returns.
Consistently Allocate a Portion of Every Paycheck
Early in my investment journey, I resolved to treat my investments as non-negotiable and committed to depositing some amount of money, regardless of its size, into my account with each paycheck. This approach has been the most crucial factor in growing my investment portfolio over the years. I didn’t adhere to a fixed percentage because my income fluctuated significantly over the past decade. Instead, I determined an amount that felt appropriate based on my current financial situation. Sometimes it was just $20 per paycheck during my part-time college job, while other times it amounted to $1000 per month during periods of robust employment. I also extended this approach to include birthday money, tax refunds, and bonuses. Regardless of the amount, maintaining a regular contribution schedule that suited my financial situation proved to be a powerful strategy. Automation, to ensure the funds were invested without manual intervention, helped prevent any temptation to use the money for other purposes.
Regularly Monitor Your Investment Accounts
Conventional advice suggests not monitoring investment accounts frequently, as market fluctuations can be unnerving. Surprisingly, I found that regularly checking my investments played a pivotal role in building my portfolio. First, it served as a reminder that I had a stake in the game and needed to stay informed. While the amount invested wasn’t substantial, it was still my money, and I wanted to stay attuned to its performance. Second, regular check-ins allowed me to reinvest dividends and keep a close eye on fees. Although the market’s ups and downs could be nerve-wracking, I recommend reviewing your investments every few weeks to monitor their performance and make early corrections if necessary.
Seek Assistance When Necessary
After a few years of making consistent contributions and reading several investment books, I decided to invest in a consultation with a fee-only financial advisor. Fee-only advisors are compensated solely for their advice and not for the sale of products or services, ensuring impartial guidance. The session appeared relatively expensive upfront, costing approximately $300, but it provided me with personalized, unbiased financial advice. This advice was instrumental in helping me double my returns over the following years, enabling me to achieve my goal of a six-figure portfolio before turning 30. The advisor helped me devise strategies for reinvesting tax refunds and diversifying my portfolio with a broader range of ETFs.
Utilize Government and Employer Investment Options
In addition to regular contributions, another significant factor in my investment growth was taking full advantage of all available free investment opportunities. I was compelled to invest initially due to a small government grant, but I realized I could reapply every few years to receive additional funds from the same program. While it required effort, it was a worthwhile endeavor. Every dollar counts when it comes to compound interest.
Similarly, a few years into my career, I joined a company offering employer-matching 401(k) benefits. This arrangement involved setting aside a certain percentage of my income from each paycheck (usually up to 5%), with the employer matching a portion of my contributions. I incorporated this alongside my regular contributions and reached the six-figure mark in my portfolio before the age of 29. Without the employer’s free investment contribution, I would have had to cut back on dining out or clothing purchases, which I preferred not to do. It’s worth checking if your employer offers a retirement match and exploring potential government programs to access additional funds.
Maintain Consistency and Stay True to Your Plan
The ultimate strategy that fueled my investment growth was maintaining consistency and adhering to my plan. While there were months when I yearned to spend the $50 allocated for investments on a night out, I stayed the course, investing the funds regardless of other financial goals that arose. I also remained steadfast during challenging periods, such as the market downturn at the start of the pandemic. I resisted the urge to withdraw my investments or halt contributions. I continued to invest, trusting that I had ample time to weather market fluctuations, which I knew would eventually rebound. As it happened, my portfolio made a full recovery post-pandemic and is now stronger than ever, exceeding the $100,000 mark. If I can do it, so can you. The key is to start, maintain consistency, and let the stock market work its magic!
