My brother-in-law is 12 years younger than me, and recently got a $2/hr raise. He was already making enough to live an independent life, albeit a simple one, so this raise is just extra money. There are a couple things he can do:
- Add $2/hr to his budget and spend it each month. $2/hr at 40 hours per week is $320 additional pre-tax dollars he can spend. It would be a nice lifestyle increase.
- Invest his entire $2/hr raise in his retirement, live on the same amount of money he does now, and move on. This might be a harder sell.
- Add $1/hr to his budget, and invest $1/hr towards his retirement. This is what I recommended.
Option 3 gives him $160 additional pre-tax dollars every month that he can increase his lifestyle with. $160/mo can go a long way when you’re young. Heck, it can go a long way at any age.
He has also never invested in his retirement, which isn’t surprising, he’s just turned 21. Who’s thinking about retirement at 21? No one. But he should, and if you aren’t investing, you should too.
Take a look at this:
If he invests just $160/mo, which is $1 for every hour he works in a month, at a relatively standard 10% return in good index funds, after 39 years he’ll have $805,499.29. And if he invests that $1/mo post-tax into a Roth IRA, he won’t owe any taxes when he pulls the money out. That would put him at 60 with just over $800,000 for his retirement. Not bad.
This is where compound interest gets fun. If he keeps going for another 5 years, he can almost double his money, and have $1.3 million at 65.
$800,000 at 60, $1.3 million at 65. Incredible.
This is not magic. It’s not impossible. It’s simple math that requires the slightest bit of lifestyle sacrifice up front. Are you really going to miss $1/hr? I don’t think so. And we aren’t even considering increasing his contributions as he inevitably earns more money throughout his career, which he should absolutely do.
Starting early is certainly important, you can see how the growth changes over those last 5 years, but starting in the first place is most important. It doesn’t have to be much. $1/hr is a great place to start.