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'Millionaires are made in their 20s and 30s,' expert says — here's how

Lance Lambert@newslambert
Twenty/20

The money moves you make right out of school, and over the next 10 years, can make a huge impact on your wealth as you age.

"Millionaires are made in their 20s and 30s, not their 50s and 60s," says Fred Creutzer, president of Creutzer Financial Services in Maryland. "If you wait until you're 50, you're never going to catch someone who started at a young age. When it comes to investing, the early bird always gets the worm."

There are nearly 12 million households in America with a net worth over $1 million. Many of these millionaires achieved that goal the tried-and-true way: They started investing when they were young and kept at it the rest of their career.

And young folks today are going to need the money. A Grow analysis finds that a 25-year-old earning $50,000 today could very well need $1.6 million saved in order to retire comfortably.

Here's how to set yourself up for financial success.

Take advantage of the power of compounding

A 25-year-old who invested $5,000 per year until the age of 35, assuming an 8% annual return, would amass around $787,000 by the age of 65. However, someone who started investing $5,000 per year at the age of 35 and continued until they were 65, with the same annual return, would only amass around $612,000.

That's the power of compounding growth. Those dollars invested in your 20s have much more time to grow in value.

This classic example of compounding growth or interest from the Federal Reserve Bank of St. Louis has the 25-year-old ending with a 25% larger final balance despite 20 fewer years of investing.

The HTML5 Herald

The power of compounding

This example shows how the earlier a person starts saving for retirement, the more time that money has to grow.

$787K

$800,000

Investor 2

Starts at age 35

Sets aside $5,000 per year for 30 years

at age 65

700,000

$612K

600,000

Investor 1

Starts at age 25

Sets aside $5,000 per year for 10 years

No investments after age 34

500,000

400,000

300,000

200,000

100,000

0

25

30

35

40

45

50

55

60

65

Note: Assumes an 8% interest rate, compounded annually.

Graphic: kiersten schmidt | grow Source: federal reserve bank of st. louis

The power of compounding

This example shows how the earlier a person starts saving for retirement, the more time that money has to grow.

$787K

$800,000

at age 65

Investor 2

Starts at age 35

Sets aside $5,000 per year for 30 years

700,000

$612K

600,000

Investor 1

Starts at age 25

Sets aside $5,000 per year for 10 years

No investments after age 34

500,000

400,000

300,000

200,000

100,000

0

25

30

35

40

45

50

55

60

65

Note: Assumes an 8% interest rate, compounded annually.

Graphic: kiersten schmidt | grow Source: federal reserve bank of st. louis

The power of compounding

This example shows how the earlier a person starts saving for retirement, the more time that money has to grow.

$787K

$800,000

at age 65

700,000

$612K

Investor 2

Starts at age 35

Sets aside $5,000 per year for 30 years

600,000

Investor 1

Starts at age 25

Sets aside $5,000 per year for 10 years

No more investments after age 34

500,000

400,000

300,000

200,000

100,000

0

25

30

35

40

45

50

55

60

65

Note: Assumes an 8% interest rate, compounded annually.

Graphic: kiersten schmidt | grow

Source: federal reserve bank

of st. louis

Take more risks while you're young

Millennials are notorious for being reluctant investors. More millennials think high-yield savings accounts are a better long-term source of growth than stock, according to a recent Bankrate survey. And boy are they wrong: Over the past 40 years the S&P 500 has posted an annualized return of 11%.

Older investors nearing retirement often shift to conservative investments to make sure market bumps don't keep them from their goals. But young investors don't need to fear a possible bear market, or even a recession: They have plenty of time to ride out a downturn. If anything, they should consider investing more when prices are lower and they can feel free to take more risks.

Consider buying a home to build equity

For many 20- and 30-somethings, a home can seem out of reach. But more young people are becoming owners: Millennials are now the largest group of homebuyers, according to a report released this year by the National Association of Realtors. And those who do manage to buy relatively early can reap long-term rewards.

While rents climb, homebuyers who get fixed mortgages can lock in their monthly payments. And if they pay a little extra on that debt, they can even eliminate that mortgage payment from their monthly budget altogether.

"They start building equity versus giving rent money away with nothing to show for it," Creutzer says. But the benefits of homeownership aren't as pronounced if it means they can no longer afford to invest in the market, he adds. So if you want to buy a home, make sure you're in a solid financial situation and you can still put away what you need to for retirement.

Avoid lifestyle creep

It's normal to want to splurge with that first paycheck. But overspending can set you back, and even land you in debt, and so can lifestyle creep—especially if you aren't already investing the 10% to 15% of your yearly income that many financial advisors recommend to make sure you're set for the future.

Instead of buying that flashy new car, for example, maybe look at a pre-owned car with reasonable mileage at a much lower cost. And the next time you get a raise, aim to boost your retirement contribution so that you don't get used to spending all of that extra money in your paycheck.

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