Painlessly Starting From Scratch
by MF DowMan

The Motley Fool is, in my completely biased opinion, perhaps the best teacher and resource for investors wanting to learn how to invest what they've saved. One area we probably don't spend enough time on, however, is the very nature of saving. The online model portfolios opened with $50,000, but that may seem like a pipe dream to you if you're just starting out and don't have a $50,000 stash sitting around.

What if you're fresh out of school with no savings to your name and a modest salary of, say, $20,000 or so a year? Enough to live on maybe, but you're despairing of ever retiring comfortably. Is your future destined to be bleak and spartan? Not if you're Foolish!

The only savings plan I've come across that makes any practical sense is a form of forced savings. People who tell themselves they'll save whatever's left at the end of the month never get around to saving anything. If you can force yourself to skim a certain percentage off the top of every paycheck (5%-10%), you can still set yourself up for that easy-chair retirement you've felt was always going to elude you. And if you can make yourself pay the monthly deposit into your retirement fund, you don't have to think about saving anything else the rest of the month. You can relax and spend every penny of what you earn beyond that with the comforting assurance that you're taking care of your retirement painlessly.

Let's look at how it can work. Let's assume you're 30 years away from retirement and you haven't got a penny put away. You bring home $20,000 a year, $1,667 a month. (It's better to work from your actual take-home pay because we all know what income taxes do to your gross salary.) You decide to pay yourself first and you commit to saving $165 every month for your retirement (just under 10% for this simplified example).

If you are starting from scratch, an obvious way to invest Foolishly would be through Dividend Reinvestment Plans using the Beating the Dow approach. As your portfolio grows, you can branch out into other Foolish investments. Let's assume you are able to average 20% annually on your investments. (Broken down into a compounded monthly return, that's slightly more than 1.50% a month. We'll use 1.50% to make it easy.)

So, you're putting away $165 a month and your portfolio grows at a compounded return of 1.5% a month. At the end of the first year, you'd have $2,184 in your retirement fund. Still a long way to go, but an excellent start.

Let's flash forward a few years to see how your fund would grow:

Beginning            $           0
   1 Year            $       2,184
  5 Years            $      16,114
10 Years             $      55,482
15 years             $     151,669
20 Years             $     386,675
25 Years             $     960,846
30 Years             $   2,363,673

In 30 years, you can start with nothing and still build a portfolio worth over $2 million dollars simply by paying yourself first from every paycheck! The most important factor I've left out, of course, is that you're not going to be bringing home $20,000 a year forever. These numbers assume that your monthly paycheck and savings contributions never change. As your salary increases, of course, you'll save more and your retirement fund will grow even more rapidly.

You don't have to be born rich to make yourself wealthy. But it does take a little discipline. No one will send in that 10% contribution each month if you don't. But if you can make yourself do it every month before you pay any bills or buy anything extra, you'll all but guarantee yourself a wealthy retirement without having to worry about it constantly or pray the government will be there to help you when you're old. How Foolishly easy and self-reliant is that?!