Do small amounts matter?

[bmephdinco]

Hi guys,

So I was talking to a friend of mine about starting a RothIRA - she's 24 and a grad student so money is really tight (like, she has to take a loan out tight).

So she laughed and dismissed my information when I told her she she try to max with $5k per year.

But what if she can only put in $20 or $30 a month? Would it still be worth it to open a RothIRA? Or would another method of investing be better?

I will pass along answers to her, but right now she's not interested enough to come here, I don't think.

[regina24601]

I think starting small is good. Some people get discouraged that they aren't able to max a 401k or a Roth IRA, so they don't contribute at all. That's even worse than contributing a small amount.

I started my Roth IRA when my salary was verrry low, and there was no way I could max it out. I opened it at T Rowe Price (because they didn't have a minimum amount required to open it) with $80. I added $80 to it each month. I've increased that steadily, but I still don't max it out (I also have a 401k that I contribute to). The fees are minimal, so I don't see any reason why it would be a bad idea.

The only thing is that it has to be earned income. So she can't use student loan proceeds to contribute to qualified accounts.

Good luck to her! Every long journey begins with a single step.

[Peace77]

Does she have an emergency fund?
I suggest having at least $500 or $1,000 in a savings account first. A credit union or money market account pays better interest than a bank savings account.

Does her employer offe a retirement plan with matched funds? If so, use that first, even if she can only contribute 1 or 2 %.

If not, then go ahead and open a Roth IRA. $20 per month will be $240 per year-- not a bad start.

[beenherebefore]

She may want to consider a traditional IRA, rather than a Roth. Since it's not taxed, it will help with the cash flow.

[thyme4change]

$20 per month, every month, invested at 8% will be $80,000 when she is in her 60's. Granted, she will need a hell of a lot more than that - but starting the savings discipline is so very important. I would encourage it.

[Peace Of Mind]

Yes, small amounts do matter. If I remember correctly T. Rowe Price will allow a small amount to start an IRA. You are a good friend!

When DH was in his early 20's the thought of retirement didn't enter his mind. So his company started putting 1% in a 401K for him. When he saw how that added up he was hooked. When I showed him my IRA he was really hooked! Because we started so young the money wasn't as missed because the amounts weren't all that high that we put away. And the compounding in that time, along with the additional savings we've added as our income improved, really made a difference to our future.

[Trongersoll]

I agree, small is better than none. some Brokers, like Schwab ($1000 to open) will let you invest in their own ETFs without charging a brokerage fee. I believe that Scottrade will do the same with Vanguard ETFs. Even if you buy only one share at a time that way, it is something. The dividend is larger than bank interest. After they receive their first dividend and see that, it builds enthusiasm. Also, with a ROTH you can always withdraw the principal if you need it with no penalty so they can get it for emergencies.

Part of what you are doing is establishing habits.

[Deleted]

The old adage is "A Penny Saved is a Penny Earned" - Even today it holds Water.

[busymom]

Yes! Tell her to start putting away a little now. Once she sees at the end of a year that 1%, 2% or 3% can add up to REAL money, hopefully that will encourage her to put away even more. I started putting in small amounts in my 20's. I wish now I'd have put away even a couple percent more. That little bit adds up over the years!

[Aman A.K.A. Ahamburger]

Great thread bme.. This article came to mind...

Become a Millionaire on a Minimum-Wage Salary
www.dailyfinance.com/2011/08/19/become-a-millionaire-on-a-minimum-wage-salary/

[kadee79]

May 26, 2012 13:07:23 GMT -5 @di said:

The old adage is "A Penny Saved is a Penny Earned" - Even today it holds Water.

Yes, start the savings habit NOW!
I still bend over & pick up pennies! They add up! It may be slow going at first but it accumulates & earns interest (free money)!
Even as little as the $5 a week in a Christmas Club account that could be put into a better paying investment at Christmas each year! It all adds up!

[Bluerobin]

I started with only the amount which was matched by the company. It added up. I also saved outside the IRA, so I could retire early. Any bit of savings is good, as long as you stick to it, and expand it when able.