What is the best way for a 18-year-old to invest $2,000?

Today I would like to look at the question of how to invest $2,000 if you are 18 years old.

You’re young and you have $2,000 to spare but you don’t know how to invest it. How do you make the best out of your investment?

Is is to squander it all expensive mining shares because you think that metal prices will be higher in two years?

Or is it better to play it safe and invest in solid businesses with steady cash flows where you are getting a decent return and safety of the money you’ve put in?

If you only have limited funds then in my opinion the best way to invest is to buy an index fund.

An index fund is the cheapest way to participate in the market.

If you look at an average mutual fund they are generally expensive.

You often need to pay more than 1.0% a year in charges for an actively managed fund and even 1.5% in some cases.

On the other hand an index fund you can get for as low as 0.15% a year which in my opinion is reasonable.

Adding up

Over the years this lower percentage difference adds up. We can now calculate how much with Microsoft Excel.

First of all, we use this formula for our calculations:

Figure 1. Formula for how to calculate the Future value (FV) from a Present value (PV) with a Rate (R) and Number of years (X).

In Microsoft Excel it then looks like this:

Figure 2. Screenshot of Microsoft Excel showing how to calculate a Future Value (FV) from a Present Value (PV), a rate, number of years and Present value (PV).

What we are doing here is that we are calculating the Effective rate that we will receive if we assume a return of 6% annually. We do this by subtracting cell C4 from cell C3 and the result is shown in cell C5.

We then plug in the numbers that we have into the formula and we get $14,496.50 out.

On the other hand, when we are calculating with a cost of 0.15%, setup is as follows:

Figure 3. Screenshot of Microsoft Excel showing how to calculate a Future Value (FV) from a Present Value (PV), a rate, number of years and Present value (PV).

The result in cell C14 is then $25,829.67. If we then calculate the difference between cells C14 and cell C7 we will get $11,333.17 in cell C16.

That is how much more money you will have when you are 65 years old at a cost of 0.15% compared to a cost of 1.5% with a starting capital of $2,000.

Conclusion:

In today’s post we’ve been looking at the advantages of buying an index fund compared to speculation/squandering of your hard earned cash.