How to turn $100 into a six-figure nest egg

Black Enterprise, Oct, 1996 by Stephanie Gallagher

You don't have to be rich to invest, but you do need a little know-how. Here are a few tips on how to grow your income.

WITH ALL THE MONEY ADVICE YOU HEAR these days, it's sometimes difficult, if not impossible, to make critical choices that will secure your quality of life during those golden years. If you haven't given retirement a second thought, consider this: Let's say you put away a mere $100 each month starting today. In 25 years, you would have a six-figure account waiting for you, if you know how to work it. The sooner you start, the more you'll be able to take advantage of the single most powerful investment weapon there is: time.

Face it. No one understands your financial situation and needs better than you. So you need to adopt a hands-on approach to managing your finances. After all, it's your money, and knowing an inside tip here and there can help steer you down a path of financial freedom for the rest of your life.

Start with the basics. If you think that pouring your money into a savings account or money market fund is the safest way to invest, you've made your first mistake. Certainly, a portion of your money should be held in safe, liquid investments such as money market funds. And you shouldn't venture beyond money markets until you have three-to-six months' living expenses in reserve. But when it comes to your retirement nest egg and other hefty investments, keeping all your cash in money markets, CDs and bank savings' accounts is just plain risky.

So-called safe investments have a major downside: they rarely earn enough to beat inflation. Like termites in a basement, inflation slowly eats away at your nest egg, year after year, practically without you even realizing it. It's insidious, and if you include the effect of taxes, you could actually be losing money--which, of course, defeats the purpose.

The best way to build a nest egg is by putting a healthy portion of your assets in growth investments, namely stocks and mutual funds. Over time, stocks have outperformed money markets, bonds and other fixed-income vehicles, turning in an average return of 10.3% every year since 1926 (see chart). Just watch how your money multiplies when you invest a set amount each month, earning 9% yearly. Even with a low investment of $50 per month, your money would grow to more than $56,000 over a 25-year period.

The amount you put into stocks clearly depends on your investment time frame. The longer you have before you need to use the money, the more you can invest. When saving for retirement, a good rule of thumb is to take your age and subtract it from 100. Invest that amount in stocks. Therefore, if you're 20 years old, you can invest 80% of your retirement money in stocks. If you're 50, half of your retirement money should be in stocks or stock mutual funds.

As a plus, an automatic investment plan will allow your money to increase even if you forget about it. A number of fund families will waive their minimum initial investment requirements if you set up an automatic investment plan to have a fixed amount, say $50 or $100, debited from your paycheck or bank account every month. Consider these fund families:

Twentieth Century (800-345-2021) waives its minimum initial investment requirement when you sign up for the automatic investment plan (equity funds, excluding gift trust and internationally emerging growth funds). Minimum investment: $50 a month.

T. Rowe Price (800-638-5660) waives minimum initial investment requirements for participants in the Automatic Asset Builder Plan. Minimum investment: $50 per month.

Invesco (800-525-8085) waives its minimum initial investment requirement through the EasiVest plan. Minimum investment: $50 a month.

Many other fund companies offer this service, and some that don't have established plans will agree to waive the minimum if you invest automatically.

LEARN FROM THE PROS

As you get started, consider that most successful investors aren't necessarily any smarter or better at analyzing financial data than the rest of us. They don't necessarily have degrees in business or financial planning but they do utilize common sense. Their guidelines are simple, and the advice is standard for novices and pros alike:

1. Successful investors have a plan, and they stick to it. It's easy to get tempted by the latest hot stock touted by a business magazine or Wall Street whiz. But that isn't the way successful investors operate. They assess their own needs first. They look at their goals, time frame and knowledge of investing to come up with a plan to suit their needs. If they are 50 years old, for example, and have 15 years until retirement, they set up a 15-year plan. They read whatever they can get their hands on and invest in what they understand. If, for example, they hear about the terrific return potential of zero coupon bonds but don't really understand how they work, they simply don't buy them.

The pros don't get sidetracked by hot tips. Instead, they buy investments they've researched or that a trusted colleague has recommended, all the while shutting out the noise of so-called experts. Thus, they can be sure of sticking to the plan they've developed.