By Nathaniel Nelson
Say you’re a recent college grad—young, but on the cusp of landing those investments for your revolutionary app idea, making a boatload of cash, and retiring at 30. In case that doesn’t work out, you might want to think ahead when it comes to money management. Sure, most of us are broke through our 20s, and retirement is at least a few decades away. I wouldn’t recommend you start investing money anywhere until you’re comfortable financially, and I am the furthest thing from a qualified financial advisor. Instead, all I intend to do is introduce you to what’s called a Roth IRA—an especially useful way to stow away your money for retirement, best for those of us with many years to go until that time comes.
By investing in an IRA (Individual Retirement Account), you can store your money tax-free, allowing it to grow with interest over the years. Aside from qualifying circumstances (medical emergency, going back to school, etc…) though, you’ll be heavily taxed for withdrawing anything from the account until you’re at least 59 ½ years old. Traditionally, you put money into an IRA and, upon retrieving it years later, pay a tax wholesale on the final sum. The Roth is distinct in that it’s taxed at first, rather than at the end. When you finally withdraw, you get every penny, as the money has already been taxed.
Of course, in a utopian society we’d all be celebrating taxes. In reality, if you prefer Uncle Sam keep his hands out of your pockets, a Roth IRA might be your best bet to prepare for retirement.
If retirement seems like too far off a concern for you at this stage in your life, that’s fair, and explainable by the phenomena of your “future self”. If you understand the principal of compound interest, however, you’ll realize why beginning your planning sooner rather than later is exponentially useful (literally). Albert Einstein once remarked that “Compound interest is the eighth wonder of the world. He who understands it, earns it…he who doesn’t…pays it.” In essence, compound interest functions separately from your participation with it—you’re either not taking free money, or even losing money, by not playing the game. That means, at this very moment, you’re not making money you could be.
Of course, it doesn’t make much sense to invest anything if you’re barely making enough to live as it is. Because interest is an exponential function, it only starts to really matter if you have some foundation to build off of. $20 earning 1.2% over 50 years, for example, is only $106.40. When you do have a bit of money, though, it’s worth dedicating as much as you see fit to a Roth IRA (or a 401(k), if your employer offers it). After all, that same math with a $2,000 investment would earn you $10,640. After a lifetime of contributions, maybe $200,000 total, you’ll be one rich prick when you decide to call it quits.
If you want to learn more about money management and Roth IRAs, I recommend the work that inspired this article: a short e-book called “If You Can: How Millennials Can Get Rich Slowly,” by William J. Bernstein—it’s free on Kindle, and designed specifically for young people who might not otherwise be aware of these sorts of investment opportunities.
Nathaniel Nelson (N8) is a filmmaker and writer.
Stories You Might Like…
By Sage Lazzaro Visana 321 1st Avenue When you arrive at this address and discover a gluten-free pizza [...]
By Nathaniel Nelson In 2016, a surprise album is like a surprise birthday party—as much as I loved the [...]
By Rebecca Benoît NEW YORK – Halfway through my flight back to New York from Paris, the man sitting [...]