Benjamins 101: time is on your side

Investment advice, especially in terms of retirement investing, probably sounds like a low priority at best and a ridiculous idea at worst right now. Nothing could be farther from the truth, especially if you're under 30. Tthe single biggest factor involved in playing the stock market is one that's in your favor: time. There was a fad in the late 1990s where people day traded, or they'd buy and sell stocks on a near-daily basis in an effort to buy low and sell high, and many unsavvy or unlucky people lost a great deal of hard-earned money trying to play that game. The truth is that time is your ally when it comes to making money in the stock market, and if you're 25 now and will be needing that money when you're 70...well, guess who benefits from a few early investments?

We discussed on Monday how little interns make, and I realize that for me to suggest that you take even a small amount from that almost-nothing that you're being paid and put it in the Great Crapshoot that is the stock market sounds like madness, but hear me out. The market is at almost record lows (yes, I know it just hit 9,000 for the first time in a long time, but trust me, that's low--and I remember it hitting 2,000 back in the 1980s), and by investing in some kind of retirement fund vehicle right now, you are indeed buying low with a strong, strong possibility of selling high many years down the road. Financial advice guru Suze Orman made the case for early investing in one of her earlier, and I opine her best, book The 9 Steps to Financial Freedom*, with this example: If you're 45 and start putting $100/month into an account that averages a 10% return, you'll have $71,880 by the time you're 65. If you start doing that same investment at age 35, you'll have $206,440 when you're 65. And if you start doing that same investment when you're 25 years old--$100/month in an account that averages 10% return, you'll have $555,454 when you're 65. Nice.

Investing in an employer-sponsored 401(k) is a good deal because of the time factor, but it's even better if your employer tosses a little in the kitty for you too. If your employer matches your contributions up to a certain percentage, that's free money. If you contribute 2% of your income, and they match up to that 2%, that means that even if the stock market reeks you still doubled your investment. You can't even get results that good in Vegas. Another benefit of contributing to a 401(k) is that the contribution is taken right off the top, before taxes are applied. That actually helps you because it decreases your taxable income, possibly knocking you into a lower tax bracket and reducing what you pay in taxes overall. Talk about sticking it to The Man.

Not so fast. The Man gets his share when you cash in your 401(k) in several decades. Since those bucks were invested pre-tax, Uncle Sam wants his when you take it out to use it. However, a Roth IRA is an investment vehicle in which you put up to $2,000 a year, all of it post-tax (you can contribute more depending on your age). Then, after the money in that Roth IRA has grown and grown over the next few decades, it can't be taxed when you cash it in after the age of 59 1/2. Another nice thing about a Roth IRA is that, unlike a regular IRA and a 401(k), generally with only a few exceptions you can withdraw the contributions you make to a Roth IRA if you suddenly need the cash without being penalized. My husband and I (who are 40 and 33, respectively) have hedged our bets against future tax issues by investing in both a Roth IRA and our employer-sponsored 401(k) programs.

When you invest in your 401(k) program, the choices of the funds may be overwhelming. Don't feel bad about going with index funds (i.e., a fund that invests a little in each of the stocks on the NASDAQ, or the Dow Jones 20, or the S&P 500), nor should you hide your face in shame if you go with a simple lifestyle fund. A lifestyle fund is a mix of funds based on your age; for example, if you're in your 20s, your lifestyle fund will be heavy on aggressive or high-risk stocks and low on mutual funds, bonds, and government investments like T-bills. When you invest in a Roth IRA, be sure to get one that's a no-load fund, meaning that there's no commission on buying it.

Investing can seem daunting right now, what with the market in such flux, but time is really on your side. Even small investments now make a huge difference in the future and will give you a lot more financial freedom that you ever thought.

*I know not everyone's a fan of Suze Orman, and I certainly don't agree with everything she says, but I do think that 9 Steps to Financial Freedom does an excellent job of explaining a lot of financial stuff to those who don't know much about saving, investing, money management, and getting rid of debt.

Is there something you'd like to see discussed here on Intern 101, or do you have a question you'd like answered? Let me know in the comments or drop me a line via email from the site. Thanks!