Alright, it’s been close to a week since the last post on jumpstarting your personal finance. Did you get started/complete the 3 basic steps before investing? If not, go check it out. Otherwise, congratulations and read on!

It’s a no-brainer that if you start investing early, you will get way more at retirement than someone who starts 5 years later than you. The key is in the compounding effect of your investments. Here are some figures:

1) At age 25, you invest $4,000 every year. Your portfolio when you’re age 65 would be worth over 1.1 million dollars! (Assuming historical 8% average annual return)

2) At age 35, you invest $4,000 every year. Your portfolio when you’re age 65 would be worth less than 800k, three hundred thousand dollars less than first scenario, hardly interesting! (Assuming historical 8% average annual return)

See, just by starting 5 years earlier, you’d retire with 300k more in your portfolio, giving you close to $1,700 more per month for retirement! (Assuming you die at age 80)

So, you’re convinced. How can you get started? Here are a few simple steps you should take RIGHT NOW:

1) Open a Roth IRA account at Vanguard. It generally has the lowest expense ratio (fees). You can also opt for T.Rowe Price or Charles Schwab. Minimum to open an account for the latter two is $1,000, but waived with $100 and $50 automatic monthly contribution, respectively. Vanguard’s minimum is $3,000 (non-waivable). Each has its own pros and cons, check out this post on investing in 401k and IRA to get more details.  I chose Roth IRA because even though the contributions are after-tax, the withdrawals will be tax-free so you won’t have to worry about your ultimate income tax rate (peace of mind!).

2) Choose a mutual fund. If you have no idea how things work at all (asset allocation, fund type, time horizon, etc), choose a target date fund. You’d see names like Target Retirement 2050/2045/2040/2035/2020 etc. The year is the year you plan to retire (say you’re 25 and plan to retire at 65, you should then choose Target Retirement 2050). Note: there have been hoo-hahs going around about target date funds not allocating the assets appropriately for those people close to retirement, so you should pay close attention to the predetermined asset allocation if you’re going to retire in the next 5 to 10 years. We’d touch on asset allocation some time, which gives you more control over your portfolio.

3) Invest $333 per month (or whatever amount you’re willing to pay yourself FIRST). Put it on the monthly automatic investments plan and forget about it for now. If you have more money, invest in your company-sponsored 401k. These are tax-efficients accounts that would give you more bang for your bucks in addition to the ROI. Not to mention, part of your 401k contributions might be matched by your company, essentially giving you free money (for real!).

That’s really it for now. Don’t swarm yourself with too many actions and thoughts when you’re just barely getting started. Execute these 3 steps, and you’d be way better off than most people when you retire! (The millionaire part seems like a pretty good bonus too)

(Picture created by Ben (yeah I’m back) from Flickr, Thanks!)

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