Your 20’s signify the start of many big steps in your life: graduating college, starting a long-term career, and, perhaps, even deciding where you want to live or who you want to marry. But one thing that is often overlooked is saving for retirement.
You may have heard this advice: “Grind in your 20’s, build in your 30’s, and chill in your 40’s.” However, with the way the economy and social security is currently, if you wait until your 30’s to build you may find yourself way behind come retirement. The good news is that if you are reading this, it’s not too late! The following are nine ways to start saving for retirement in your 20’s:
1. Establish a budget.
As the saying goes, “If you don’t know where you are going, then any road will get you there.” This is a simple idiom suggesting only those who are focused on their destination and purposefully plan will get there. Establishing a budget will put you on the right savings path for retirement. It will give you accurate information—like how much you can possibly save at this exact time and what adjustments need to be made, if any.
2. Pay yourself first.
This priceless wisdom was first introduced in the classic book Richest Man in Babylon by George S. Clason and simply says that whenever you have any income coming in, you should set aside a certain percentage for yourself first. This needs to be applied toward retirement as well, and either begins with taking advantage of your employer sponsored 401(k) or opening an IRA (Individual Retirement Account) and setting up automatic contributions. This way, saving for retirement becomes a habit and automatic.
3. Control your spending.
I know this isn’t rocket science, and in no way am I trying to insult your intelligence, but the less you spend, the more you’ll have for savings. Controlling spending isn’t just about savings; it is also about investing money wisely. When you work hard for your money, it is instantly gratifying to spend it.
Controlling spending now will enable you to create your future nest egg. Also, to be clear, controlling spending doesn’t mean that you can’t enjoy your hard earned money now; it just means that you do so intentionally.
4. Understand how compound interest works.
The simplest way your money can grow is by earning interest on your principal (or the original amount invested) or deposited money. When you decide to leave the interest and principal in your account, you start earning compound interest (interest on top of interest and principal).
The magic in this concept is that the earlier you start, the more money you will have when you retire. Let’s say you decide to contribute $5,000 per year starting in your 30’s, earning a modest 4% return rate. If you decided to retired by age 65, then you would have accumulated a healthy $402,722.01 in your account for retirement. Not bad, right?
Well, if you started 10 years earlier, then your retirement account would be a healthier $658,558.72. That is almost $300,000 more just for starting earlier. That’s the power of compound interest!
5. Get out of debt.
Similar to the earlier concept of controlling spending, getting out of debt will also provide more money to save for retirement. The money you are paying your bank in interest on your debt or loans is money that could be going into your 401(k) or retirement account. So you are losing the amount you’re paying in interest, but also the amount of money that you could have been making if that money was invested.
Granted, not all debt is created equal. If you have student loans or a mortgage, those items are considered “good debt.” However, if you have high-interest credit card debt, you need to rid yourself of it as soon as possible.
6. Take advantage of free money and benefits.
Not so long ago, an employer matching your 401(k) contribution was standard. Then the 2008 Great Recession happened and many companies took away this privilege. But many employers still offer this as an option, so be sure to ask! Make sure you take advantage of it, since it is practically free money. Your employee handbook can also detail additional benefits that may be advantageous for retirement.
If your employer offers a health or dependent care savings account, and/or flexible savings, these can help you save money on expenses that you may have, in turn leaving you more money to save by reducing taxable income.
7. Open a self-directed retirement account.
Opening up a self-directed retirement account allows you to invest in your retirement account. But do your research on what to invest in, and know that most self-directed accounts have mutual fund options that allow you to mitigate risk by investing in multiple stocks. Also know that there is a certain risk (and reward!) factor with a self-directed account.
8. Be aggressive.
Right now you have many years of earning power ahead. And, presumably, your income will only increase with time. In your 20’s, you may choose to take an aggressive approach with the investment vehicles you are using in order to grow your retirement account. Right now you have everything to gain!
9. Open a roth account.
Traditionally, 401(k)s and IRAs are tax deductible, meaning that any money you contribute would reduce tax liability. The advantage? Your money grows tax deferred and the only time you pay taxes is when you withdraw. But the Roth IRA allows you to withdraw money tax-free. This is a great option because the earlier you start to save, the more you will accumulate via compound returns, only helping your retirement grow.
This post was originally published on April 23, 2016.