Becoming a millionaire may seem like quite an aspirational goal, but an attainable one in the future for most K-State students. No games, no gimmicks but a big dose of compounding. Compound growth that is, which simply means earning interest on top of interest.
Here is a quick example:
- If you started with $500 and earned 9% annually, you would have $545
- The second year, you start with $545 and earned 9% annually, you would have $594
- The third year you start with $594 and earned 9% annually, you would have $647
Get the picture?
Can $50 a week get you to $1 million?
Compounding works best over long periods of time, but you don’t have to begin with a large amount of money. If you started as a student saving and investing as little as $50 a week ($2,600/year), that would grow to a million dollars over the next 40 years (assuming a 9% average annual return). The primary purpose of investing even small amounts early, is to build that saving and investing muscle and create the habit. Once you graduate and start working, your saving and investing will no doubt increase along with your income.
Even more powerful compound growth after graduation
Let’s turn to an example that looks at growing your money after you graduate and start your first job. According to the Bureau of Labor Statistics (bls.gov), the median U.S. income in 2020 was $67,860 for those with a bachelor’s degree and $98,436 for those with a master’s degree. Keep in mind that income amounts will vary widely based on your years of experience, field of study and geographic location. Many employers will even match your investing through an employer sponsored retirement plan, like a 401(k) or 403(b). A common employer contribution match is 6%, so we will use that in our example. Using a $60,000 income, here is what getting to a million dollars looks like when using the power of compound growth:
- $60,000 income after graduation
- You save and invest $9,000 (15% of your income)
- Your employer matches with $3,600 (6% of your income)
- Assuming a 9% return
- 24 years
The total value of your account after 24 years would be $1,054,631. Yes, you will have over a million dollars while you’re still in your forties! Do you think you could do it even sooner? Do you think it will take you longer? Or perhaps you think the rate of return should be higher or lower? Have a little fun trying different assumptions yourself, with this investment earnings calculator from Bankrate: https://www.bankrate.com/calculators/retirement/investment-goal-calculator.aspx.
Compound growth and the stock market
As you can see, this concept of compound growth is a powerful, passive way to grow your money through saving and investing. It can get complicated, but a simple way to start investing in the stock market, is through an index fund. These funds are simply a basket of stocks or other investments that follow a particular index. An index fund can be in the form of mutual funds or exchange traded funds (ETFs); just remember that they are simply a basket of stocks or other investments and designed to spread your risk across many different investments.
One of the best gauges for the U.S. stock market is the S&P 500 index. The S&P 500 is the 500 largest and most widely held U.S. companies and include brands familiar to most of us like Apple, Amazon, Google, Chipotle, Starbucks, Nike and even Tesla. When you invest in an S&P 500 index fund, you are the proud owner of a piece of these companies, and the hundreds of others included in the index. Have a look at the current list of all the S&P 500 companies here: https://en.wikipedia.org/wiki/List_of_S%26P_500_companies.
The average return of the S&P 500 index over the past 20 years was 11% and you can find the most current returns on any investing app or website such as Google Finance (https://www.google.com/finance/quote/.INX:INDEXSP). Most major brokerage firms will offer an index fund that tracks the S&P 500 in addition to many other investments. Place where you can invest in the S&P 500 index via either a mutual fund or ETF include investment companies such as Vanguard or Fidelity, plus there are many others.
Learn more from Powercat Financial
Understanding the power of compound growth is just one of the many areas that can help you on your journey to financial success after college. Powercat Financial can help you with education around your personal finances through one-on-one counseling sessions or group presentations, via Zoom or in person. We can educate you on investment terminology and foundational knowledge, however we cannot give you specific investment advice. Appointment requests can be made by clicking on the purple buttons on the Powercat Financial website at www.ksu.edu/powercatfinancial. Don’t forget you can also stop in and ask a question without an appointment at our next scheduled “Pop-Up to Powercat Financial”, located on the Union 3rd floor in room 302 the first Friday each month (March 4, April 1, or May 6) from 9am to 4pm.
If you are a graduate student, be sure to join us for the upcoming “Grad Money Hour Series” in March and April, where investing and several other money topics will be discussed. You can get the details and register here: https://www.k-state.edu/grad/student-success/student-council/studentaffairs/
Jacqueline Koski
Peer Counselor I
Powercat Financial
www.k-state.edu/powercatfinancial
powercatfinancial@ksu.edu
