WARNING: Avoid the Worst Financial Advice You'll Ever Receive
At some point in your life a well-meaning relative, mentor, or friend will say to you, "Whatever you do, pay off all of your debt before you do anything else." When you hear this politely nod your head and then, when the person isn't looking, TURN AND RUN AWAY AS FAST AS YOU CAN!
But wait, isn't all debt evil and shouldn't I try to get out of debt ASAP? Actually, no. Let's say you've just graduated from dental school with $400K in student loan debt. Or you just graduated from a 4 year state school w/$50K in student loan debt. Same difference. Once you start earning a paycheck, you have the chance to leverage what is considered the eighth wonder of the world - the power of compounding interest (the power of time and money).
COMPOUNDING INTEREST
Let's say the starting salary in your first job is $30,000 per year. And let's say you decide to put 10% of your salary into your company's 401(k) plan. You decide to put your 401(k) contributions into a low fee stock index fund (thereby minimizing your expenses). Assuming you never get a raise the rest of your life (and not even considering a company match) your $3K annual contribution, starting at the age of 22, will grow to about $850,000 at age 65. For those scoring at home, that's using a 7% rate of return, after inflation and including dividends, which is the ballpark historic return of the S&P 500.
Now let's say you are busy paying off all of you student loans and other debts the first 10 years of your career. So you don't start contributing that $3,000 per year into your 401(k) till the age of 32. Guess how much you'll have in the account at the age of 65? Ready? Less than half - about $410,000.
Remember - my first example above (the $850K amount) is super conservative, as it assumes you never get a raise and doesn't include a company match. If you factor those things into the equation, you'll be able to buy your own island when you retire!
THE POWER OF TIME
Why the incredible difference between starting your retirement savings at age 22 versus 32? The power of time. Which you can never, ever get back.
I often have people say to me that they are not 22 anymore so what's the point of trying. My response? The best day to start saving for retirement is the day you get your first check. The next best day? Today. You can't change the past, but what you do today will impact your future.
Final example: let's say you start saving $5K per year at the age of 35 versus age 45 (using the same investment parameters as above). Starting at age 35 will get you to about $543K. Starting at age 45? Only $239K.
It's your future - the choice is yours.
