Compound interest is the eighth wonder of the world

Roth IRAs and the Power of Compounding

Millennials are lazy, entitled, and can’t get out of their parent’s basement.

Millennials are wizards of social media, liberal, and ready to change the world.

Millennials have less money to spend, more student loans, and are frequently becoming stuck in low quality jobs.

Millennials, born between 1980 and 2000, are shaping our economy as they reach their prime spending and working years. But how can they shape our economy positively when they are in such a miserable financial state? In order for millennials to improve the world they first need to improve themselves.

The first and perhaps most important step is to set up a Roth IRA.

To understand why you should invest in a Roth IRA first let’s look at why millennials don’t have any money. According to a Goldman Sachs report on Millennial Infographics in 2013 millennials have less money to spend due to lower employment levels and smaller incomes. While unemployment has been declining to its lowest levels in 2008 what good is it if 44% of millennials are stuck in part-time, low-wage, or dead-end jobs (Stahl)?

Not only do we have less money to spend but we are drowning in student debt. In the Goldman Report student loans have risen by almost 100%. The tuition at my alma mater Wake Forest will be $48,746 in 2016–17 and I can tell you that I’m not excited to balance paying my student loans with the extra high cost of living in New York.

These economic conditions are changing the way our society operates. With lingering effects from the Great Recession and uncertainty about the future of the economy millennials are putting off important events in their lives such as marriage and purchasing their first house.

But worst of all millennials are failing to save money. Data from the Federal Reserve shows that millennials took more of a hit on their retirement accounts and they’ve recovered much less than the portfolios of the entire population as a whole. Studies show that the net worth of today’s 29- to 34-year-olds, that of older millennials, is significantly lower than the 2007 net worth of that year’s 29- to 34-year-olds. Jillian Berman of Marketwatch writes in 2015 that 52% of the millennials between the ages of 25–34 have less than $1000 in savings. 52%! How can they expect to do anything in the future: have kids, go on vacation, or retire?

You don’t need to be just another loser with no money. It’s time to save more efficiently and more effectively. How do you rise above these dreadful statistics? Invest in a Roth IRA. A Roth IRA is an individual retirement account which is an ideal savings vehicle for young, lower-income workers who won’t miss the upfront tax deduction and who will benefit from decades of tax-free, compounded growth. You can contribute to a Roth IRA at any age as long as you have earned income from a job. The Roth IRA is flexible. You can withdraw your contributions at any time after the age of 59 without taxes or penalty and most income groups are eligible, especially at a younger age.

Roth IRAs are insanely easy to set up. You can use multiple IRA service providers such as Fidelity, Merrill Edge and E*Trade which provide one-on-one interactions with very little fees if any at all. Want to go at it by yourself and choose your own portfolio? Investing Guru Benjamin Graham always thought that it was best if the defensive investor put 90% of their portfolios into market index funds and left another 10% in their portfolio to fool around with. The best part of a Roth IRA is that you can start right away.

Most people are hesitant to start saving early — They want to wait until they’ve paid off debt or until they have a higher paying job. Many people don’t start seriously saving until their 30s. To put off saving is ludicrous because if you start saving early you get to utilize a very important and powerful tool. That tool is compounded interest. Compounded interest occurs when the interest that accrues to an amount of money in turn accrues interest itself. Compounding provides an easy path to becoming a millionaire by the time you retire. I like to think of it as free money. Your investments into your savings account continue to build and build upon each other until you have a large chunk of change in your pocket… tax-free.

If you still aren’t convinced that compounding interest is a big deal let me show you an example using a Roth IRA calculator. Two different scenarios. In the first, you start your IRA at 29, putting in $2,000 initially and thereafter investing a meager $1,200 a year. That’s only $100 a month. With a 7% return annually by the time you’re 65 you will have $214,053. Not bad. Here’s the kicker à in the second scenario you do the same exact thing only this time you start saving eight years earlier at the age of 21. By the time you retire you will have $380,956. That’s a 78% increase! That’s the power of compounding. I cannot emphasize enough the importance of starting early.

“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” — Albert Einstein

Millennials are market movers, changing the economic and social landscape. With rising college debt, an increase in part-time jobs, and lingering effects from the Great Recession it is important that the younger generation prudently saves through the use of a Roth IRA. Don’t hesitate, don’t just shrug off what I’m telling you, go to your computers, talk to your parents or your financial advisor and go invest in your future. Right now people my age have a very valuable commodity that most people don’t have. That commodity is time. Take advantage of this time and start saving money. It’s time to remove ourselves from the financial constraints of being a millennial and from the ensuing stereotypes.

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