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How to Make the Most Money With the Least Effort

I recently sat down for lunch with a good friend, Mike, to chat about savings and investing. I asked him what he hoped to take away from our conversation, and he said with a smile, "I want to make the most amount of money with the least amount of effort." Our conversation spanned far and wide, but there were three things that I think will help anyone who has the same mindset as he does.

Save, save, save
Mike is a 25-year-old in a marketing profession and has met with success thus far in his work thanks to his diligent efforts. He has started to see his job not simply an occupation but as a career, and his company not as a provider of paychecks but as an employer. As he considered what the next 40 years of his life might look like, he began to think about preparing for retirement, and that's where I came in.

My first piece of advice for him was to make a budget and begin saving. He's a salaried employee, so he knows what his monthly income will be. I advised him to start by thinking of what percentage of his income he'd like to save, taking that amount off the top, and then setting out budgeting parameters for housing, insurance, food, a car, and other expenses. Devoting one hour a month to keep track of that budget can go a long way over the course of a lifetime.

In a hypothetical scenario of someone who made $45,000 at age 25 and saved 5% of his income, he would set aside $187.50 per month in the first year. If his salary grew at 5% per year and worked until age 68, saving 5% each year, he would have saved more than $340,000.

Yet if he saved just 2% more each month ($75 per month in year one) with a savings rate of 7% over the course of his career, his savings would grow to $475,000. Those small incremental savings can make a huge difference over a number of years. The following graph shows the dramatic difference one or two percent can make in our employee's scenario:

To make this saving effortless, you can set up monthly transfers so your bank can move the money you set aside automatically from your checking to your savings account. Some companies will also allow their employees to have a certain percentage of their checks direct-deposited into separate accounts. The bottom line is that diligently saving is the most important step to begin making money with the least amount of effort.

Invest carefully and diligently
While $475,000 is a lot of money, over the course of a career, any advice on savings has to be coupled with advice on investing. I learned that Mike had a company 401(k) plan that offered to match half of what he contributed. Many companies offer these benefits, and workers should absolutely take advantage of them. Learning what options are available, whether through a 401(k) plan, Roth IRA, or some other savings vehicle, is an absolutely essential part of investing carefully. So is taking advantage of tax benefits, or free money your employer is willing to give you.

Another key aspect of saving is to not be swayed by one-time fads or trends. One can easily be sucked into a belief that there's a new hot trend that will, for example, let you double your money in six months. Just remember the adage that "if it sounds too good to be true, it probably is," and stick to safe means for investing. It won't be exciting, but it'll yield results down the road.

On the subject of diligence, I also told Mike to not be swayed by the commonly held belief that investing is in a sense like gambling and is dictated primarily by luck. With a good amount of research and effort, one can find individual stocks that are likely to beat the market. However, since Mike wanted to again "make the most amount of money with the least amount of effort," I told him that he should take his savings and put it into mutual funds.

Mutual funds do all of the hard work and effort to create investments that match what someone is looking for, whether it be retiring in a specific year or just one that matches a specific sector or the market as a whole. I encouraged him to consider a fund that simply tracked the S&P 500, which has historically returned about 7% per year. By selecting one with a low cost, one can mimic that return pretty easily.

Invest patiently
I know that 7% doesn't sound like a lot. Yet thanks to the beauty of compound interest, an investment that gains 7% per year will double roughly every 10 years. By never touching your money and simply patiently waiting until the day you retire, you can rack up an incredible return at the end of the road.

Going back to our previous example of a 25-year-old with a $45,000 salary, let's say that person decides to save 6% per year in a 401(k). Let's also say his company will match half of that amount, or 3%, and that he had every dollar of savings placed into an S&P 500 index fund over the course of his career. Let's then say he did that every week until age 68 and never touched his retirement account until he retired. Do you know how much he would have at the end of that time with a 7% return?

Get ready: $2,398,876.

Yes, that's correct. Nearly $2.4 million. Here's what that growth looks like at age 30, 40, 50, 60, and 68.

The bottom line
Though it looks small at first, through diligent, patient saving over the course of a career, one can make an incredible amount of money without a whole lot of effort.

How to start investing
Even the smallest efforts can have a monumental impact on your future -- and The Motley Fool is here to help you start that journey. In our brand-new special report, "Your Essential Guide to Start Investing Today," The Motley Fool's personal-finance experts show you why investing is so important and what you need to do to get started. Click here to get your copy today -- it's absolutely free.

Read/Post Comments (6) | Recommend This Article (15)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 17, 2013, at 2:20 AM, prginww wrote:

    pie in the sky, very few people even average 5% raise every 2 years.

  • Report this Comment On November 17, 2013, at 8:55 AM, prginww wrote:

    Don't forget about inflation and taxes. $2.4m at 4% inflation rate is equivalent to $444,000 today. That is before the tax man gets his piece.

  • Report this Comment On November 17, 2013, at 10:07 AM, prginww wrote:

    Don't forget to asset allocate and rebalance annually. That'll reduce the volatility and perhaps you'll stick to the plan.

  • Report this Comment On November 17, 2013, at 12:20 PM, prginww wrote:

    So where do 25 year olds find a 45K a year job? Most people under 30 that I know make more like 20K-30K a year, and have a huge student loan debt burden. Few jobs offer raises of 5%, a year. Your example looks like a fantasy devised to make the article work.

    Why don't you look at this realistically and do the same analysis for someone making 25K with 60K or more in student debt. Statistically a few 25 year olds will make 45K a year, but most make far less. How should someone with low wages and student debt save for retierment? That would make for a better more informative article.

  • Report this Comment On November 17, 2013, at 3:12 PM, prginww wrote:

    It doesn't matter where you start...just as long as you start... If you get a 2% raise, start with one percent in your 401k, or IRA or Roth IRA ... You get another 2% the following year, up yourself to 2% for retirement savings...and so on.... It works over time. I started at 23 with 4% to my 401k and added 1% every year as I received a raise, or changed jobs for a higher paying position. I am 21 years into my career and I am now maxed in my 401k so well above the 9% (7% contribution 3% company match scenario) and above the savings indicated at the age level on the chart above. Start small to your retirement, continue to pay you student loans, and build your percentage over time if you have to.... But the point is to start, because if you don't there will be anything there to compound over time.

    I did not start in a high paying profession like finance, accounting, IT or engineering... And it seemed like such a tiny salary and a tiny amount in that 401k account when I started....but I made the decision to start some where.... So you can do this even from humble beginnings....

    It does not feel easy... Giving up 1% to save for retirement each time you get a raise feels like a struggle early on because they look like tiny amounts that won't add up to much.... But believe me, your 40 something self will thank your 20 something self for doing so...

  • Report this Comment On August 19, 2014, at 2:54 PM, prginww wrote:

    To reply to some comments above: I started working at a fast food restaurant when I was 16, making $5.15 an hour. I became a shift manager at 18 making $6.25 an hour (only ten years ago). At the age of 19 I was promoted to an asst manager making $465 per week. At the age of 20, I was promoted to 1st asst manager making 550/week. At the age of 22 I was promoted to a General Manager at $36,500 per year. Now at the age of 28, I am making over $46,000 a year. I receive a raise each year(based on my restaurants' sales and profits and also my teams performance) that varies. Minimum raise is 0% (have to do a crappy job)..maximum raise is 10%. I usually average a 7% raise a year. I also have 401k, which my company matches 25% of what I pay in. I have health insurance and receive a monthly bonus for meeting certain goals. It is definitely possible to make $45,000 a year in your 20's. If I can do it without a college education, then surely someone with a college degree can do it! It just take confidence, hard work, and great work ethics! You have to go above and beyond. My aunt also works for the same company as I, and she makes right at $60,000 a year as a General Manager of a fast food restaurant. She has been there twice as long as me but there are ways to make a decent living and prepare for retirement! You just have to work hard and stop with all the pitiful me syndrome and be positive!!! Just my opinion and my experience. :)

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