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Why Gen Z needs to invest early

Investing is all about the power of compound interest, which helps your money grow over time. It’s crucial to start investing as early as possible to reap higher returns, and it’s harder to catch up once you’re older.

Orman explained that a 25-year-old could start putting $100 a month into an S&P 500 index fund — which investors typically use as a benchmark for the U.S. stock market — through a Roth IRA every year until they hit 65.

“It’s very probable that you will average a 12% annual rate of return over 40 years,” Orman said. “At the end of those years, you have a million dollars.”

On the other hand, she said, if you hold off on investing until you turn 35, for example, you’ll end up with just $300,000 at the age of 65.

Now, while it’s true that you’ll definitely benefit from investing at 25 as opposed to waiting a whole decade to get started, the average annual return from the S&P 500 is actually closer to 10%.

This means you’re more likely to grow your funds to around $500,000 after 40 years instead of $1 million — although that’s still significantly more than hitting only $200,000 after 30 years.

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Here’s what you need to do to get started

Although Orman seemed to believe the majority of young Americans would rather mindlessly scroll on social media and buy fashionable clothing than take the time to work on their investments, the two aren’t necessarily mutually exclusive.

Say you’ve got $200 left over from your paycheck each month, after budgeting for your basic expenses and perhaps putting some into an emergency fund.

You could still keep $100 for your fun purchases and invest the rest. And some platforms let you start even smaller and use the spare change left over from your everyday purchases.

You also need to pick your preferred investment vehicle. If your employer offers a 401(k) and matches contributions, you can put in pre-tax dollars and let it grow until you make withdrawals in retirement — which do get taxed.

Orman also mentioned the Roth IRA, where you’ll pay regular income taxes on contributions in order to make tax-free withdrawals in the future.

In comparison, with a traditional IRA, you’ll make contributions from your income before taxes are taken out and let your money grow tax-free until you make withdrawals later on — similar to the 401(k).

Several financial personalities, like Orman, prefer the Roth IRA over the traditional because you can enjoy more money in your retirement years (unless you plan to be in a very low tax bracket by then).

As for your investments, you don’t have to invest in the S&P 500, although many experts consider it a sound strategy if you don’t want to take on too much risk and invest in something stable. You could also consider using a robo-advisor that builds you a customized and diversified portfolio and automatically rebalances.

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Serah Louis is a reporter with Moneywise.com. She enjoys tackling topical personal finance issues for young people and women and covering the latest in financial news.

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