The Most Powerful Force in the Universe
Albert Einstein, when asked what the most powerful force in the universe is, supposedly replied, “compound interest.” This apocryphal statement is even more true for young students. Investing when you are young will allow you to retire at what most would consider young, thus making the hoops you have jumped through in school more meaningful as the decades roll by progressively more rapidly.
The reason compound interest is so powerful is that time does all of the work for you. Some of you may not have heard the following example, so I will share a brief version of it. Imagine that there are two people, both twenty years of age. One of them puts 2000 dollars in a Roth IRA every year until age 30. The other puts 2000 dollars in the bank at age thirty, and continues to make 2000 dollar contributions every year until age 65. Unfortunately, the person who started at age thirty will never catch the person who started ten years earlier, all because of the powerful effects of compound interest over time.
The Boston Globe has a more elaborate example of this. For those of you interested in seeing this in action for different amounts of money and expected rates of return, check out Money Chimp’s Compound Interest Calculator.
The following video explains the math behind all of this. Jimmy Chang does a good job making some complex calculations seem simple.
I am currently in the process of setting up my own Roth IRA. Since I started out in just a typical, individual account, this process is a bit more involved since I have to liquidate my shares (sell them), move the money from my original account into the Roth IRA, and then buy them again.
To avoid this hassle, I recommend that you start out originally in an IRA if possible. For students, a Roth IRA is probably better than a traditional IRA. Though taxes will be levied on contributions to a Roth IRA, withdrawals during your retirement will NOT be taxed like a traditional IRA. A traditional IRA is better for those already in a higher tax bracket, so unless you are making all kinds of money now, I would recommend going into a Roth.
I currently use Scottrade since it only requires a 500 dollar minimum deposit, and only charges 7 bucks per trade. If you need help, I can walk you through the process of setting up your account and choosing some of your first investments. Let me know, and I’ll send you an e-mail.