The Price of Waiting to Invest
It would seem that for college students the best investing years are still to come.
The promise of starting salaries well in excess of the meager income we derive from part-time jobs or allowances will surely make it easier to save in the future.
While it is likely to be easier to contribute to your IRA from your future salary, do not underestimate the power your current dollar has.
I.
Low Income Tax Bracket II.
Power of Compounding III.
Tax Advantaged Space I.
Likely by the time your paycheck has grown to the point in which you feel you can comfortably allocate a portion to your savings, you will be in a higher tax bracket.
Your investment has taken a haircut equivalent to your tax bracket.
Lets assume that we are investing in our ROTH IRAs the maximum limit of $5,000.
It would cost the average college student $5,500 to fill up this tax advantaged space and the average college graduate $6,1250.
By investing in college you had to earn $750 less than the average college graduate.
II.
The power of compounding is the most valuable investment advantage college students have.
Assuming you are twenty years old and plan to retire at age sixty you have at the very least forty years to allow the powers of compounding to work (your money is still compounding while you drawl from your portfolio).
As you can see in the table above every dollar you invest today is worth forty-five dollars if your portfolio were to receive the average rate of return.
With this in mind suddenly minimum wage from your work-study does not look as meager and your time is looking a lot more valuable.
$7.
25 X $45.
26 (from Table 1.
2) = $328.
14 per hour While 10% is considered the average rate of return for the stock market past returns are no guarantee of the future.
Lets assume a safer, inflation adjusted, average return of 6%.
While hardly as impressive as a return on investment of 10% each dollar is worth approximately ten dollars.
$7.
25 X 10.
29 = $74.
61 (On a side note I believe it is incredibly valuable to realize what your time is worth.
Even if we are focusing on the future value of your time.
) III.
Finally you must consider the fact that once tax advantaged space is gone, it cannot be recovered.
By beginning to invest earlier you have increased your likelihood of minimizing your future tax consequences.
Proper planning and utilization of tax advantaged space can result in the ability to retire significantly earlier then if your savings were instead in a taxable account.
The promise of starting salaries well in excess of the meager income we derive from part-time jobs or allowances will surely make it easier to save in the future.
While it is likely to be easier to contribute to your IRA from your future salary, do not underestimate the power your current dollar has.
I.
Low Income Tax Bracket II.
Power of Compounding III.
Tax Advantaged Space I.
Likely by the time your paycheck has grown to the point in which you feel you can comfortably allocate a portion to your savings, you will be in a higher tax bracket.
Your investment has taken a haircut equivalent to your tax bracket.
Lets assume that we are investing in our ROTH IRAs the maximum limit of $5,000.
It would cost the average college student $5,500 to fill up this tax advantaged space and the average college graduate $6,1250.
By investing in college you had to earn $750 less than the average college graduate.
II.
The power of compounding is the most valuable investment advantage college students have.
Assuming you are twenty years old and plan to retire at age sixty you have at the very least forty years to allow the powers of compounding to work (your money is still compounding while you drawl from your portfolio).
As you can see in the table above every dollar you invest today is worth forty-five dollars if your portfolio were to receive the average rate of return.
With this in mind suddenly minimum wage from your work-study does not look as meager and your time is looking a lot more valuable.
$7.
25 X $45.
26 (from Table 1.
2) = $328.
14 per hour While 10% is considered the average rate of return for the stock market past returns are no guarantee of the future.
Lets assume a safer, inflation adjusted, average return of 6%.
While hardly as impressive as a return on investment of 10% each dollar is worth approximately ten dollars.
$7.
25 X 10.
29 = $74.
61 (On a side note I believe it is incredibly valuable to realize what your time is worth.
Even if we are focusing on the future value of your time.
) III.
Finally you must consider the fact that once tax advantaged space is gone, it cannot be recovered.
By beginning to invest earlier you have increased your likelihood of minimizing your future tax consequences.
Proper planning and utilization of tax advantaged space can result in the ability to retire significantly earlier then if your savings were instead in a taxable account.
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