Can you be successful if you start investing in your 30’s? A lot of common financial advice is to start investing $200 a month at age 18. But I don’t know about what you were like when you were 18, but I was broke AF college student. I was taking out student loans, getting drunk for the first time and I did not know about the stock market, let alone have any money to invest in the stock market.
I didn’t start investing until I was 27. A lot of Americans don’t start investing until after they’ve paid off their student loans, until after they’ve bought a house, after they’ve had a kid or have checked off these other life milestones first.
Today, we’re going to talk about an investing strategy for first time investors at age 30. The truth of investing is the earlier you can start, the more opportunity your money has to build wealth. So if you can start investing before 30, I encourage you to do that. But if you’re 32 and that ship has sailed, don’t worry, you are not behind.
Most Americans retire at 61. So if you’re 31, right now you got 30 years to retirement, maybe even more if you want to work until 65 or 67. That’s a long time. You can put your money to work over the next 35 years to build wealth and financial stability. Time is your greatest asset. So whether you’re 30, or whether you’re 40, right now, the most important thing is to get started.
What is the S&P 500?
To show you the potential growth that your money could have over these next 30 or 35 years. Let’s take a look at the historical returns of the S&P 500 Index. This is an index that tracks the biggest companies in the United States. I’m talking Apple, Microsoft, Amazon, these are the big dogs in business around the world. Over the past 30 years, it has delivered an average annual return of approximately 9.89%. After accounting for inflation that becomes 7.31%.
Why I use 7% returns for calculations
So for our calculations today, we’ll use a 7% return. Just to clarify, because I get this question a lot from people, what’s a good return? What’s the return I should be looking for? What can you guarantee me a specific return? Let’s talk a little bit about this average return. When we look back at 100 years of data as of September 8, 2022, the yearly average market return of the S&P 500 was between eight and 12% only eight times. Most of the time, the returns are much higher or much lower. For example, in 2019, the S&P 500 returned 30.43%. That is so high! So this 10% that you see a lot of people using, it’s based off of that 9.89%.
Adjust it for inflation, that is taking these really high years, as well as these really low years where the market returns negative 20% or negative 5%, and we are averaging out to this 7%. You’re not going to see every single year 7%, 7%, 7%, necessarily. This is just the average. It’s just doing that math. We’re taking the highs and the lows, and we’re mapping out to that 7%.
Investing Scenario 1: $250 a month at age 30
Let’s imagine you’re a first time investor and you have 250 bucks a month to invest. That’s it. That’s all you’ve got. What can that get you over the course of 30 years? Let’s break it down year by year. $250 bucks a month is $3,000 a year. I would not mind if someone started paying me an extra $3,000 a year! Let’s further break down what this $3,000 a year can get you over the course of 30 years.
In year one, you start with your initial investment of $3,000. Assuming the average annual return of 7%, your investment is going to grow to $3,210. In year two, you do $250 a month, totaling $3,000, bringing your total out of pocket investment to $6,000. With the same average annual return, your investment is now going to grow to $6,434.70. In year three, you keep doing that $250 a month, bringing your total out of pocket contributions to $9,000. The power of compounding really starts to become evident here, because now you are at $9,885.13.
So you can see that over time, you’re putting in out of pocket contributions, but you’re getting more money on top of that, that’s the power of compound interest. Now over a short three year time period, it’s not that sexy. Let’s flash forward 30 years and see where that gets us after 30 years. You will have contributed $90,000 out of pocket. But thanks to that 7% compound interest rate, your retirement fund will have grown to a very cute $284,875.55.
Investing Scenario 2: Contributing more in the next 20 years
This is without ever increasing your contributions. You just contributed $250 bucks a month, every single month for 30 years. But if we play around with your contribution number a little bit, we can get to very different numbers. For example, if you contribute $250 bucks a month for the first 10 years, and then $400 a month for the next 20 years, you’ll have $357,172.91. Not so bad. But you might be thinking $357,172 bucks is nice to have, but it’s not enough to retire on in the United States. And you would be correct.
Here’s the thing about retirement planning is that your stock market investments are likely just one part of your overall retirement and financial picture. You might own a home, you might have a pension, you might get an inheritance, you might have a partner that has significant assets, there’s a lot of other parts of retirement. And with $357,172 invested, you can safely withdraw $1,100 a month and leave the rest invested, so that it keeps earning you money.
It’s a common fallacy that people believe that once you retire, you withdraw all your money out of the stock market and keep it under your bed or something. But that’s not true, you leave the money invested, so it has a chance to earn you even more money. So this $357,000 can continue to grow, can get up to $380,000-$400,000 depending on how long you live and how much you leave in there.
The stock market won’t be your only investments
Let’s look at this bigger financial picture. Pretend you’ve got your $357,000 bucks that’s chillin in the stock market doing its thing. Maybe by the time you turn 65, you also own a home outright and it’s worth $300,000. Well, boom, your net worth has basically just doubled right then and there. So now you’re worth $657,172 bucks. If you have a partner that has $400,000 invested and you each take home $1,000 a month from Social Security, your monthly household income is likely around $4,200 a month and your net worth is over a million dollars. Not so bad for someone who started investing late at 30! You still retired a millionaire.
If you want to learn more, we have a free investing guide that goes into more detail around not only how to get started, but how to diversify your investments across things like real estate and the stock market.
The steps to start investing at age 30
Open an IRA
The first thing I would do is open an IRA. If you make more than $100,000 a year open a traditional IRA, if you make less than $100,000 a year, open a Roth IRA, then set up a recurring contribution to a sustainable index fund. Please do not invest in the companies that are destroying the world around us.
For 2023, the maximum amount that you can put into your IRA for the year is $6,500. So that breaks down to about $541 a month. That’s a really good goal. If you have to start at $250 bucks a month, then we want to be increasing until we’re at $541 bucks a month.
Open & use your workplace retirement plan, if available
Next, you want to open and use your workplace retirement plan if your job offers a 403B, a 401K or a 457. Especially if they offer a match, you want to be taking advantage of that. This is another retirement account that you can be stacking up dollars in.
Open a brokerage account
Then if you still have more money after you are contributing comfortably to both of these retirement accounts, you can open a brokerage account which is a non-retirement specific investment account. It’s much more flexible and so it can be used for things like taking a sabbatical paying for kids colleges, or saving for a down payment on a house you want to buy in five or six years. Those are much more flexible accounts.
That’s the step-by-step guide to investing starting at 30. It’s really not as scary as it sounds and I promise: you are not behind 30 is young. I’m not saying that “30 is so young,” #girlpower. I’m saying that you literally have 30 plus years until you actually retire. So use that time to be investing. That is plenty of time to build a lot of wealth. We’ve used one example here today, but if you are investing $500, $600, $800 a month, you will retire a millionaire, no problem.
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