Why You Should Start Saving While You’re Young
“Start when you’re young,” is an expression that’s tossed around in a lot of different scenarios. Learn a language while you’re young. Travel the world while you’re young. Overcome your securities while you’re young. Fall in love while you’re young…and so on and so forth. Saving money is especially important when you’re young, and I don’t just mean learning how to manage your money in general by keeping a healthy savings account or saving up for something special like a vacation or engagement ring. It may sound crazy, but I’m actually referring to a 401(k). If you’re in your twenties, it’s the perfect time to start saving for retirement. The earlier you start, the better.
As soon as you start earning a regular income and have a little money left over each month, it’s the time to start thinking about your retirement- well, at least putting it on the back burner. It can be a little unsettling thinking about reaching retirement when you’re in your early twenties just entering the working world. However, according to Bankrate, “the very fact that you’re young gives you a huge edge if you want to be rich in retirement.” This is because you can invest a relatively small amount for a shorter period of time and, because of inflation, save up more money than an older person who invests more money over a longer period.
If you start saving early, becoming a millionaire by the time you retire is actually not out of reach. Vanguard reports that if you save just under $4,500 a year over a 45-year work period, you could have over $1 million saved by the time you reach retirement age. If you are able to invest in a retirement plan where your employer makes a matching yearly contribution, you could put in as little as $2,200 per year.
Saving for retirement now may sound a little daunting, but if you come up with a strategy, it shouldn’t be! Here are some things you should start doing right now to plan for retirement:
- See a financial advisor: Don’t be ashamed to seek out professional help to get you started. A financial advisor will be able to help you evaluate your finances and formulate a plan to start saving. Outside of meeting with an advisor, you could also brush up on your financial knowledge with the plethora of resources you have available- the internet, books, magazines, etc.
- Set up a 401(k): If your job offers it, invest in a 401(k) plan. The nice thing about this work benefit is that most employers will match their workers’ contributions up to a certain percent to encourage participation. If your company doesn’t offer a retirement plan, sign up for a Roth IRA instead. A Roth IRA is funded with taxable money from your paycheck, but when you remove the money at a later date, it will be tax-free. If you want to ensure that you hold yourself accountable for investing each month, set it up so that a portion of your paycheck is automatically deposited.
- Be an aggressive investor: Investing in stocks comes with its own set of risk; however, if you invest in a variety of different stocks while you’re young, you should be able to offset any fluctuation in the stock market. According to Ellen Rinaldi, executive director of investment planning and research at Vanguard, “From an allocation viewpoint, someone in their 20s has a very long horizon, so they can handle the ups and downs of the market. They can recover from a downturn. As a result, they should be heavily invested in equities.” Stocks traditionally grow at an annual rate of 10.4 percent, versus the 5.4 percent of bonds, so Rinaldi advises putting 90 percent of your investments in stocks.
- Avoid debt: You should actively avoid going into debt whatever age you’re at, but it’s especially important that you start out on the right foot and make changes now to reap the benefits later on. Many recent college graduates will start off their career with debt as a result of student loans, but save money where you can by avoiding frivolous purchases and saving up for larger purchases. With some simple lifestyle changes, you can overcome credit card debt.