Start Early and Invest Regularly - Ch 2 Bogleheads Series at Catch a Gideon

October 31st, 2006 by digerati

This is Chapter 2 of my Bogleheads Guide to Investing Series. I am reading the book and sharing what I learn in each chapter as we go along. Here’s the Boglehead Series page at Successful Personal Finance.

Chapter 2 - Start Early and Invest Regularly

(On a side note, the title could be rewritten as Invest Early and Often, coincidentally the same as my strategy for e-voting).

The Magic of Compound Interest

The Rule of 72: to determine how long it takes an investment to double in value simple divide 72 by the rate of return.

Compound interest is good, and it’s even better if you start early. If you invested $21,321 when you were 15 in a fund with a return of 8% per year, you’d have $1 million at age 65! I’ve discussed compound interest before.

An example with IRAs. If Earic Early (ha) invests $4000 a year into his Roth IRA beginning when he is 25 and stopping when he is 35, he has invested a total of $40,000. Larry Late makes the same contribution of $4000 per year from the time he is 35 until he retires at 65. At that age, Erics investment is worth 29% more than Larry’s!

Above all, the key to wealth is saving!

The hard part is acquiring the habit of savings (no you can’t charge that…). Bogle heads do investing (holding assets over long periods and selling at a profit) rather than speculating (buying and intending to sell quickly to make a profit). Generally Bogleheads have less risk since they are not gambling. Getting rich quick is the realm of late night TV infomercials (who may be getting rich quickly?) not of the real life person. Besides, “the problem with getting rich quickly is you have to do it so often.”

When you earn a dollar, try to save 20 cents. Some will try to save 50 cents! The more you save, the sooner you achieve your financial freedom. You can’t invest what you don’t save.

Finding the Money to Invest

There are two ways to find money to invest:

Make more money
Save more money

Generally you have a choice about one and not the other. I recommend that you do both when possible.

Pay your self first - If you wait till you have money to invest, then you’ll wait forever. Give yourself money to invest before you put it toward other things (except high interest debt).
Create Tax Free fortunes for just $11 per day - create a Roth IRA account. Reduce your spending by $11 per day and put the money in the account instead. That will max out your IRA for the year and it will develop with compound interest until you retire.
Put future pay increases into investing - many people complain they can’t live off of less money. If that’s the case, then live off the same money, but invest the rest when you get a raise or bonus.
shop for used items. A used hammer works just as well as a used one. Amazon, case in point.
don’t frequently buy items like new cars.
move to a less expensive area (although often you get paid less as well. If you get paid less but save the same percentage of your income, then it is probably better to be in a higher cost area since your net savings will be higher and you can invest more. More to a low cost area when you retire and you’ll live like a king!) You can always be in the same general area in a cheaper house or apartment. That’s never a bad idea, financially anyway.
create a side income - this helps not only have extra money to invest but also if you lose your job or have unexpected purchases to make.

The most important thing is to start saving as quickly as possible. This is far more important than the best rate of return or anything else.

Have you bought the book yet?