Twenty-Somethings, Take Note…$5,000 Becomes Millions

This is one of those trick riddles for those who love word problems in math class…
a. Chris is 25 and saves $3,000 a year for ten years (or $30,000) and then stops saving.
b. Greg is 35 and saves $3,000 a year until retirement at age 65 (or $105,000).

Who has more money when they reach 65?

The answer isn't intuitive, but Chris ends up with almost two times more than Greg at age 65. Assuming each of them earned 10% annually, Chris would have $1 million and Greg would have only $543,000.

The key Point to Remember: Time Pays Big Bucks!
You may be thinking, I'm young and barely making it off my measly "just out of school" salary. I'll wait until I'm making more money before I start saving for retirement. Besides that's so far off, it won't hurt me to start when I'm 30. Well, waiting does hurt. Saving just a little bit now yields huge gains later.

Let me tell you a little story that may encourage you to forego some conveniences in favor of saving. Meet Anne Scheiber, a New York woman, who invested $5,000 that grew steadily to $22 million until her death 50 years later. Her money grew at an average annual rate of 18.3%.

Few investors have matched Anne's performance, and she didn't do it with high-flying internet stocks. What's even better, Anne's time-tested investing style can be used by anyone — even small investors. She relied on patience and sticking with her investment strategy.

Given Anne's performance, it is not unreasonable to think that twenty-somethings with $5,000 today who follow her example could amass a multimillion-dollar portfolio by age 65. Then they could live the rest of their lives with all the money they would ever need, plus the comfort of knowing they could eventually give away their millions as they saw fit. In Anne's case, since she was estranged from her family, her entire $22 million went to New York City's Yeshiva University.

Anne went to work as a bookkeeper at 15 and put herself through college at night, eventually going on to law school. She joined the Internal Revenue Service as an auditor in 1920 and passed the bar exam in 1926 at age 32.

She focused on two key lessons she had learned. First, women, especially Jewish women at that time, had little chance of getting ahead. She was consistently one of the top auditors, but never got promoted. When she retired in 1943, she was making just $3,150.

The second lesson learned from poring over other people's tax returns was that the surest way to get rich in America was to invest in stocks. She concluded that she couldn't change the fact she wasn't getting promoted, but she could take care of herself through investing.

Anne began saving money with a fervor by forgoing any "luxury" item. Rather than buy new clothing, she made do with what she had. Then she would use her savings to invest. Anne plowed every dime into the market. Her sacrifices and patience eventually paid off. Unfortunately, she didn't have the personality to enjoy her wealth in her later years, but at least it was there for her.

Disclaimer: The views represented above are those of the author, and the information provided here does not constitute any tax, investment or legal advice. The historical data presented are for illustrative purposes only. Past performance is no guarantee of future results.