Investing early, even when earning low income
I think that one should start investing as early as possible. What happens if you delay investing for just one year? You miss the growth of the money you would have invested that year for the entire duration of your investment. Therefore, even if you are earning a fairly low income, it may still be worth the hassle to find a few extra bucks to invest.
Let’s consider the following scenarios.
In 2008, the maximum you can invest in a Roth IRA is $5,000. Let’s say you invest this entire amount in a Roth IRA (which is tax-exempt), put it in an index fund earning 11% annually, and never contribute anything again. You will, based on past market performance, had approximately $114,461 in 30 years.
If you leave the money in the bank savings account at 5% interest, which is then taxed at 25% every year, you will end up with only $15,087 in 30 years. Please keep in mind that 5% interest in the savings account is most likely not sustainable for 30 years!
If you realize your mistake quickly and after 1 year, take this money out of your savings account and put it in a Roth IRA for the remaining 29 years, you will have only $106,996 at the end of 30 years. That’s a $7,465 or more than 6.5% difference!
Do you have your emergency cash fund set up? Are your high-interest credit card and other loans paid off? Are all your bills paid as well? Barring some unforeseen circumstance and if you fit eligibility requirements, you may want to consider investing some of your remaining money in a Roth IRA.