As graduation season approaches, many new graduates are beginning to learn how to manage their finances independently. One straightforward investment strategy that stands out is auto-investing, especially in US stocks. Ramit Sethi, a self-made millionaire in his 30s and the host of Netflix's $Netflix(NFLX)$ reality show "How to Get Rich," offers valuable advice to fresh graduates: invest 10% of your annual salary consistently. Over time, this approach can lead to significant wealth accumulation.
The Simplicity of Auto-Investing
Auto-investing is a method where a fixed amount of money is regularly invested into a specific investment vehicle, such as a low-cost index fund. According to Sethi, index funds, which track market indices like the S&P 500 $S&P 500(.SPX)$ , are an excellent starting point for beginners. By investing in an index fund, your money is automatically diversified across numerous companies, reducing risk and lowering costs compared to actively managed funds.
Long-Term Investment and Compounding
Sethi emphasizes that wealth accumulation takes time and leveraging the power of compounding is crucial. Investing 10% of your salary might seem daunting initially, but starting small and gradually increasing your investment can make a significant difference. The key is to begin early to maximize the growth potential of your investments.
For example, if you invest $1,000 with an annual return rate of 7%, it would grow to $1,070 in a year. The following year, the 7% return would apply to $1,070, not just the initial $1,000. This compounding effect means your investments grow exponentially over time. CNBC's calculations show that if you start investing $100 weekly at age 21 into an account with a 7% annual return, you could accumulate over $1.4 million by age 65.
Conclusion
Auto-investing in US stocks, especially through index funds, is a viable strategy for those looking to build wealth over the long term. By consistently investing a portion of your salary, starting early, and harnessing the power of compounding, you can set yourself on the path to financial success. While it may require some discipline and patience, the rewards are well worth the effort. So, take Sethi's advice to heart and begin your auto-investing journey today for a secure financial future.
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