- Start early in life to invest.
- Invest in common stocks.
- Be thrifty.
- Pick the right investment.
1. Start early in life to invest
Start young. Many people wait until age 50 before they realize what has happened.
Let's assume you want to have $1 million by age 65. That may not be enough , but it is a lot more than most people ahve when they decide to retire from the world of commerce and frustration.
- If you start at age 35 and can realize an annual return of 10% compounded, you will have to put aside $6,079 each year.
- If you delay until you are 45, it will mean you have to set aside $17,460 each year.
- If you start at age 55, the amount gets a little steep - $62,746!
2. Invest Mostly in Stocks, not Bonds
It takes commitment, even if you start early, to save for the future.But if you buy bonds, CDs, or a money market fund, the task is even tougher.
Let's try the different ages again, but this time assuming a compound annual return of 6, instead of 10%.
Also, let's assume you want to have $1 million by age 65.
- If you start at age 35 and can realize an annual return of 6% compounded, you will have to put aside $12,649 into CD each year. - that is a lot more than the first illustration.
- If you delay until you are 45, it will mean you have to set aside $27,185 each year.
- If you start at age 55, the amount you will forced to set aside for fixed-income vehicles will be $75,869 each year.
3. Be thrifty (Don't be a Spendthrift)
An important ingredient of successful investing is discipline.
Of course, it pays to earn an above-average salary.
If you make $30,000 a year and have 4 children, you are not likely to end up rich. Sorry about that.
On the other hand, there are plenty of people who make great incomes and still don't own any stocks. The reason: They can always find things to buy.
Successful investors not only make a good income, but they are thrifty shoppers.
For instance, do you need a new car every 2 years? I happen to be rich and I buy used cars. Not rusted-out jalopies - normally, I buy Buicks that are 3 years old.
If you want to find out how people get rich, you should get The Millionaire Next Door by Thomas J. Stanley and William D. Danko. Typically, millionaires are extremely careful how they spend their money and they invest in good-quality common stocks with very infrequent trading.
Invest enough to make it worthwhile, such as 10% of your income. You can do this if you are thrifty.
4. Picking the Right Investments
The final factor is picking the right stocks or mutual funds.
Surprisingly, this is the least important factor. That is because no one knows how to do it consistenly.
There are mutual funds with good records, but those managers are rarely able to duplicate their performance year after year. However, that shouldn't deter you from trying. You will pick your share of winners if you do your homework and exercise patience.
Finally, make sure you don't make any big bets. Diversify over a few stocks in different sectors or industries.
You will need to be financially educated and do enough reading to ensure you pick stocks that have the potential to make you rich.