Everybody wants to invoke the ‘Oracle of Omaha’, when discussing investments, and not to take anything away form Warren, but, even he will tell you, what he did, was, really, quite simple. In fact, you can do it too.
The earlier you begin the longer you have to grow your cash crop. While teens often have birthday, Christmas and babysitting money, it’s not until one reaches their 20’s and enters not only into the workforce, but into the world, that true financial habits are bred.
From the amount you earn every month, subtract your bills. Rent, utilities, groceries, insurances, and gas. Whatever remains at the end of the month is your disposable income. From this fund, set aside a given amount every week for investment purposes. Strive for a minimum of 10% of your take home pay.
Invest in good companies, with good management, and continued growth. As long as those factors remain the same, hold the company stock, and continue to buy regularly. Watch as your investments grow, and your shares begin to compound.
Invest in companies that offer dividends, and re-invest those dividends. Some companies share the profits with their stock holders, by paying a certain amount per share. This is called a dividend, and is usually paid every 3 months.
Set a weekly or monthly amount to invest regularly and do it. Start with 2 or 3 companies, and build up to at least 100 shares before adding additional companies.
Diversify. After you acquire your first 100 shares, begin looking for other well managed, dividend paying companies to invest in. Large positions, in a few, great companies are better than a few shares in many good companies. A strong portfolio, can be built with as few as 5-7 companies.
Adjust your investment. As your earning power increase, remember to adjust your investment amount to keep in line with your investment allocation. When you’re making $250 a week, and you’ve allocated 10% of your pay to investment, it’s easy to fall into the $25 a week rut. If, in a few years, your still in the habit of investing $25 a week, that’s fantastic. At the same time, if you are now earning $400 a week, think about that 10% goal you set, and pick up your investing to $40 a week.
Doubling. By re-investing your dividends, the money your initial investment makes, continues to earn money, and position in the company. This in turn helps your annual return rate. By striving for 8-10% annually, you will double your investment every 5 years.
Consistency is the key. Once your income and your investments take off, keep investing that 10%.While your new money won’t have as many doubling periods, your continued application of funds will build and grow in preparation of your next doubling period.
Finally, a 20 year old with a one time, $5,000 dollar investment would have over 1 million dollars by age 65, assuming a doubling every 5 years.(10-20-40-80-160-320-640-1.28m).
A one time investment of $500 dollars at birth, would net that same 60 year old, twice as much. By simply adding $50 a month to that newborns initial investment, you could have 2x that again, or nearly 5 million dollars.
Not bad for 50 bucks, huh?