- Start Saving Young
One of the most fundamental lessons in personal finance is the importance of saving and investing at a young age. As a young adult, you may not think about funding your retirement account because it seems like an eternity away, but time will sneak up on you. Investing at a young age isn’t easy, but compounding interest is your friend and is very powerful. Don’t shy away from investing because you don’t have a large amount of money to work with. Instead, make as many small investments as you can and give them time to mature. Use the following example to help put the significance of saving early into perspective:
- Rate of Return: 6%
- Initial Investment: $0
- Inflation Rate: 3.1%
- Tax Rate: 15%
- Saving $100 a month @ 25 years old = Retire @ 65 with $156,122
- Saving $100 a month @ 35 years old = Retire @ 65 with $85,246
- Saving $100 a month @ 45 years old = Retire @ 65 with $42,146
- Saving $100 a month @ 55 years old = Retire @ 65 with $15,937
- Pay Yourself First
You might think you’re going to set up your retirement account after your next paycheck or maybe stash a little money away for an emergency, but month after month goes on and what do you have to show for it? If you don’t set a plan and pay yourself first, it’s hard to keep disciplined. When you don’t pay yourself first, by the time you pay for rent, groceries, utilities, and maybe a movie or a night out, you most likely won’t have much to put into savings. The benefit of paying yourself first is to assure your financial goals are covered–especially some of the basics like emergency savings and retirement. Paying yourself first is easy to do through automatic transfers and if you don’t already have a retirement account, Idaho Central has great products for you to choose from. Talk to an Idaho Central team member about our retirement products and to get your automatic transfers set up today. Even if you can only save one dollar at a time, it’ll be another dollar there that wasn’t before.
- Make the Most of Your 401(k)
Maxing out your 401(k) contributions is one the best ways to make sure you have a comfortable retirement account waiting for you when the time comes, especially if you receive matching contributions from your employer. Even if you can’t make the maximum contribution, consider supplementing it with any bonuses or profit sharing payments you receive. Set a specific per-paycheck amount and don’t change it unless you absolutely have to. If you can try to save a minimum of 15% of your gross pay to invest in a saving account with reasonable return, you’ll fund yourself a pretty secure retirement.
- Take Advantage of Compound Interest
You’ve probably heard it time and time again, but using compound interest really is the key to building a successful nest egg. Time is money, and when it comes to investing you’ll want all the time you can get. The earlier you save and invest your money, the longer it can sit and gain interest in a retirement account. Let’s say you were to invest $1,000 in a retirement account that pays 8% interest quarterly. If you were to invest $100 a month for the next 30 years, you would have saved $37,000 but your account would be worth $159,191.
- Practice Patience
It’s important to remember that saving for retirement is a long term goal that takes dedication and consistency to maintain. Realizing that it takes time to build wealth will go a long way in helping you make smart investment decisions. It can be easy to sway off your financial path when times get tough, and even easier to give up on your saving goals entirely. We live in a culture of ‘Now,’ where we want the next best thing, but no one wants to actually save for it. Delayed gratification is a diminishing value in the American culture. The average American makes retiring much harder for themselves than it needs to be. Practicing patience not only helps you discover what’s important to you, but it allows you to keep your goals in mind for the long term.