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Words to Live By: Start Saving Now

When you’re in your 20s, and someone reminds you to start saving for retirement, mostly what you hear is, “blah blah blah.” You toss that bit of advice into your Words of Wisdom box, along with “eat your vegetables” and “go to the dentist twice a year,” and tell yourself you’ll worry about that later. You have lots of time, you think.

The trouble is, when it comes to saving for your future, you really can’t afford to wait. By the time you get around to signing up for your 401(k) or opening an IRA, you may have missed out on some of the most important wealth-building years of your life.

Use Time to Your Advantage
Compounding, which allows the interest or dividends to build upon themselves over time, is the main reason it pays to start saving early. When you’re 20-something, and you invest a small amount each month until you reach retirement age, you may wind up with far more money than someone who starts saving in their 40s or 50s. Consider this example:

Let’s assume you sock away $200 per month in your 401(k) or IRA—a fairly doable amount for most people, especially if some of that contribution involves a match from your employer. As you can see, the earlier you start building your nest egg, the bigger it gets. The exponential growth over time takes your breath away. According to this calculator, a 25-year-old feasibly could become a millionaire by the time he or she reaches age 70. On the other hand, if you wait until you’re 55 years old to start saving for retirement, you may find yourself coming up short during your golden years.

Hypothetical 8% Rate of Return on $200 monthly contribution
This is a hypothetical example and not intended to reflect the actual performance of any specific investment. Earnings are pretax, and may be subject to income tax when distributed.
Source: 360 Degrees of Financial Literacy

Five Easy Tips for Setting Up Your Future

  1. Open your retirement account while you’re still in your 20s. Your youth gives you a huge edge if you want to be comfortable in retirement.
  2. Treat your retirement savings as another bill you must pay each month by “paying yourself first.” If possible, have it deducted from your paycheck and automatically deposited into a retirement savings plan.
  3. Include stocks and/or stock mutual funds in your retirement portfolio at an appropriate level for your age. Typically, the younger you are, the larger your allocation to stocks should be.
  4. If you work for an employer that doesn’t offer a retirement plan, open your own IRA. Anyone can open a personal IRA with as little as $50 or $100 initially.
  5. Educate yourself on the basics of investing for your retirement. Just as you intuitively know why you should eat right and take care of your teeth, you should understand how investing works, and why starting early is one of the easiest ways for you to reach your retirement goal.

Remember, “Start saving now” is not just a frivolous piece of advice to be set aside and dealt with later. They are words to live by. If you’re not sure where to begin, help is available here at Jemma Financial.

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