Go ahead and admit it. Every time the Powerball jackpot climbs into the stratosphere, you find yourself fantasizing about what you’d do with all those millions.
I certainly do.
In early August, the $448 million Powerball jackpot was divided among 16 county workers from Ocean County, N.J., and two other winners. Paul White, 45, of Ham Lake, Minn., walked away with a cool $86 million after taxes.
As fun as it is to dream about the mother of all paydays, your odds of winning the lottery remain next to impossible: about one in 175 million.
That’s why I much prefer reading about people who have become millionaires not by luck, but through patience and smart investing.
Money Magazine, Forbes and other financial publications frequently feature people who are, or soon will be, worth a cool million.
These not-so-instant millionaires typically have several traits in common. They started investing at a young age, they put at least some of their money in stocks, which tend to have a higher return over time. They avoid debt. They stick to a budget, or at least keep their spending in check. They invest regularly, they take advantage of tax-friendly accounts by opening an IRA or maximizing a 401(k) account at work. And they don’t panic when the market takes a downturn.
I first learned about the magic of compound interest when I took a business math class in college. Before that, I had never thought about how much money you could end up with by making regular investments that earn a reasonable rate of return.
A couple years ago, I ran across an article by Forbes columnist William Baldwin, who suggested that parents could just about guarantee their kids will retire comfortably if they take out a Roth IRA for them while they’re still teenagers.
There are a few things to keep in mind, though. Under federal tax law, a minor can put up to $5,000 a year into a retirement account, but that money has to come from income he earned at a job. As long as your kid earns money from mowing lawns or working as a lifeguard, you should be able to open the Roth IRA, where that money will be able to compound tax free for a whopping 50 years, Baldwin says.
Here’s one simple example that illustrates the power of compound interest. A $5,000 investment earning 7 percent interest per year grows to nearly $40,000 if allowed to compound at that rate for 50 years.
A qualified financial adviser or a mutual fund company can show you how to put your money to work.
So go ahead and plunk down a few bucks on Powerball tickets as long as you consider it part of your entertainment budget and not a path to riches. But keep in mind that the best way to become rich is the slow and steady approach.