Accumulating Wealth

It's been said that more wealth has been created by investment in real estate than by any other method. I'm inclined to agree. Unfortunately, when we are young, we usually have:

A. little time or interest in investing
B. little money to spare for this purpose
C. scant knowledge of how to go about it

This is unfortunate because by the time you wish you had started, it's usually too late to realize the lofty returns you could have garnered had you started earlier. The same could be said for not only real estate, but for investing in an Individual Retirement Account (IRA).

Most people put off investing until they reach their prime earning years when, and if, there are surplus funds available. Few have the knowledge to understand the magic that compounding small sums can have over time.

Parents need to think about how they can build a nest egg for their children starting when the child is still young. Let's say you have a five year old son and he takes out the trash and cleans his room and maybe helps do miscellaneous chores. Now lets say you credit his work by depositing twenty bucks a week into a Roth IRA which you have had the foresight to set up for him. And just for simplicity's sake, lets say you only do this for one year. At the end of the year the Roth IRA would have $1040.00 in accumulated deposits.

The Roth IRA is a powerhouse because it is free of tax - all earnings accrue tax free because income tax was paid on this money prior to depositing it into the IRA. However, your five year old didn't have enough earnings to create an income tax liability. Cool, huh?

Now, your farsightedness has led you to discover there are mutual funds out there that will accept small initial opening contributions for Roth IRAs and you decide to check them out. Bingo. You find one that has an average long term growth record of over 15% annually. Wisely, you start your son's Roth IRA with this firm and invest the total accumulation in the mutual fund.

Now you forget it and let it do it's magic for the next 60 years. You contribute no more after the first year. Guess what this little maneuver will do for the little one at retirement time. Holy Cow!
Could this possibly be correct? The Roth IRA has grown - tax free- to a whopping $1,127,000.00

You say, hey, I think I'll do this for myself too. I'll stick $1040. Into an account for myself and let it accumulate the same way and at the same rate. I still have 30 years till retirement. Well, that's great and I wouldn't knock it but unfortunately in 30 years you will only have accumulated $68,860.00 --not too shabby, but no cigar. So you will have to save appreciably more to come up with a nice little retirement nest egg. You can do the math on a simple calculator located at: http://www.moneychimp.com/articles/finworks/fmfutval.htm

Chomp on this proposition for a while and if you have any questions you can enter a comment below or e-mail me and I'll do my best to supply the answer. Nothing in this article should be construed as financial advice as I am not certified or licensed to give out such. Run it by your accountant or attorney and see what they have to say about it.

Coming soon. How to turn your home into a gold mine.

© 2005 David Agniel