You’re at your new job and making a nice salary, but, maybe you’ve got some student loan debt, so you think, “Why not use all of my spare cash to pay down my debt and start saving for retirement later?” Right?
Wrong.
There is too much at stake to wait. The earlier you start the harder your money works for you, here’s why:
The Magic of Compounding
Yes, you’ve heard this before, so, I’ll be brief. When you start investing early, you earn money on your money. Let’s say you start with $1,000 in your 401(k). If your investments earn 6%, you’ll have $60 more in the account at the end of the year. That’s simple interest. But in Year Two, you earn interest not just on the original $1,000, but also on the $60 in interest you’ve already earned. In other words, your interest earns interest. That’s compound interest. The magic of compounding works best the younger you are, because that means you have more time for your money to grow.
Your Money Goes to Work Saving for Retirement
The Magic of Compounding may even mean that one day your money works harder than you do. Put your money to work with this example: Say you are earning $75,000 a year, receive 2% annual raises and contribute 10% of your paycheck to your retirement plan where your investments earn 6% per year. You’ll hate those first few years when your account looks puny and your earnings don’t compare to what you’re putting in, but, be patient. By the end of Year 1, you’re putting in $625 per month and your account is earning $38 per month. But, by the end of Year 13, you’re putting in $790 per month, but your account balance is now earning $821 per month. That’s putting your money to work.
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You May Earn More Than You Think on That 401(k)
The argument of pay down your debt is often boiled down to the question of where you could earn more – in an alternative investment or by paying down your loan and “earning” the interest rate you are paying on it. But, if you get a company match, the fact is that you are earning 100% of the amount you are matched before you even account for the market. Foregoing vesting questions, this is easy money.
Your Life Only Gets More Complicated
If you think it’s hard to pull together enough money to pay your bills and save for retirement now, rest assured your life is about to get more complex. Your future may bring a new home with mortgage payments, lawns to be mowed; possibly children who bring a multitude of expenses as well as saving for college. Start living within your means now – including line items for saving for your future and for now – and you’ll find yourself in a much better place in your future.
Are you saving enough? Use our calculator to see how close you are to your goal.
If it’s time to get your portfolio on-track for financial success, schedule a call with me to start the discussion.
