How Your Investment Intersection Can Inspire You to Continue Saving
One of the difficulties of saving for retirement with investment vehicles like 401 (k) is that it takes so long to get to the point where the market seems to actually work for you.
You will be contributing for many years, maybe even decades, before you reach the intersection in the popular book on personal finance Your Money or Your Life, or the point where the returns on your investment start to outpace the contributions you make. (and your employer if you have a match) DIY. And if you think your investment is not paying off, it can make it difficult to continually save money throughout your career. However, once you get into it, you will see that all your diligent savings literally pay off.
Here’s a simplified example of how this works from Real Deal Retirement’s Walter Updegrave: You start earning $ 45,000 a year with an annual increase of two percent. You contribute 10 percent of your salary to 401 (k), earning six percent of your annual income. Things are slow at first:
In the first month, in this example, you deposit $ 375 into your account, which is a total of less than $ 2 of return on investment for the month. Even after you’ve spent a full year of contributions, or $ 4,500, your investment will only bring a little over $ 20 per month to your account balance, or only about 5% of the total you deposited in the first year.
It doesn’t seem like much and can actually be a little demoralizing. But gradually your earnings increase, and you eventually reach a point where you earn more than you save each month (emphasis mine):
After five years, the return on your investment will be about a third of the monthly amount you contribute yourself.
By the eighth year, your investment income will be more than half of your monthly contributions.
Then, after a little over 13 years in this regime, you hit that intersection point where your investment return starts to exceed the amount you save outside of your paycheck.
This is the golden mean. “Your portfolio is now running on both cylinders, thanks to a significant contribution not only from your own recurring savings, but also from the return on investment,” writes Jonathan Clements of Humble Dollar . “After that, your nest egg grows rapidly.”
(According to the Updegrave description in 13 years above, your investment will be over $ 500 per month, while you deposit around $ 485).
Of course, this is not just sustainable growth. There is inflation to fight, as well as higher wages, the return on your investment, and your ability to consistently save over time. You will fail just like any investor. But you will get better and “buy the stock at a bargain price,” as Clements notes.
And, as Updegrave writes, reaching the intersection shouldn’t be your main investment goal when you retire; rather, your goal should be to accumulate consistently over a long period of time so that you have sufficient funds for a comfortable retirement (perhaps even 30 years).
So yes, investing is a long game, but keeping this crossover point in mind can help you keep faith when the markets get volatile and in the first few years of slow growth.