How to Invest on a Small Salary

Here's an interesting piece that illustrates that even people on a lower salary can save up a sizeable amount of money if they have enough time and persistence. The details:

Say you're making $25,000 a year and know that (along with feeding yourself, paying for gas, rent, etc.) you need to start thinking about your future. It pays to do that, because even small amounts add up surprisingly fast if you invest on a regular basis. And Uncle Sam will even kick in free money on top of that.

For instance, over the past 10 years, the stock market, at least as measured by the S&P 500 Index, has returned around 8%, on average, annually. Say you start with nothing and invest only $10 per week. If you pick an investment that only matches the S&P's 8% return, after 10 years, you'd have around $8,000. You have $10,000 if you got lucky and picked an investment that churned out 12% average annual returns.

Even better, if you're a poor person, the government rewards you by refunding as much as half of what you put in. Singles earning up to $15,000, head of households earning up to $22,500 and married joint filers earning up to $30,000 get a credit of 50% of funds contributed to an IRA or 401(k). That means, for instance, if you invested $1,000 in your 401(k) last year and qualified for the credit, your refund would be $500 larger. (A dedicated saver could turn right back around and plow that $500 into a Roth IRA as well.)

Ok, so you're not going to be fabulously wealthy, but over time it's likely that your income will increase -- and then you can save even more. Do this for years and years and you can't help but end up rich. If you do put in $1,500 a year as noted above ($1,000 of your own and $500 back from the government), you'll have almost $389,000 in 40 years. Add to that the value of your house -- which you've hopefully paid off at retirement -- that's a lot more than most people have.

Comments

[limeade]

Informative post. Having just started my first job out of school last year, I qualified for the credit you're talking about for contributing to retirement accounts. It pays to learn as much as you can and think about your future.

-limeade
http://fiscalmusings.blogspot.com

[Rocketc]

A joint filer with three kids, making $32000 can't take advantage of this? Is this gross income or adjusted taxable income?