Start Investing Young
It’s hard for me to give advice on starting early for your retirement savings because it was something I did not pay attention to in my youth. By the time I hit my late twenties I realized that it was going to be an important part of my life and began studying investing ferociously.
Youth and Consistency Matter
By investing consistently when you are young, the process of compounding will work to your advantage. The amount that you invest grows substantially over time as interest is earned and the time values of money works in your favor. Retirement can seem an eternity away in your 20s and 30s, but it shouldn’t be overlooked.
Failure to Plan is Planning to Fail
It’s easy to ignore retirement in your 20’s and 30’s, but ignoring will have disastrous consequences. As you move through life developing relationships along with career growth, retirement may drift into the background of daily responsibilities that are often overshadowed by work at hand or more exciting tasks such as getting a new job or pursuing better opportunities for advancement within current employment status. This is not acceptable because this lack of attention could lead to bankruptcy, working well beyond age 65 or possibly even making it impossible to retire. Failure to plan is planning to fail.
The World is Not Perfect so Plan with a Baseline
In a perfect world, we’d plan consistently and constantly for our retirements across the breadth of working lives. We would adapt to changing circumstances and engage in judicious savings. Planning early on is about more than goal setting - it has to do with how finances work. Firstly wealth has nothing to do with how much you make and everything to do with how much you save…pay attention!
40% Rule of Thumb
The 40% rule of thumb is the optimum amount of your income you should be living on to become wealthy. You say…WHAT? IMPOSSIBLE!
There are Two Ways to get to the 40% Rule of Thumb
Firstly, squeeze every penny of waste out of your spending until you are at 40% living expense. In my opinion this is the hardest path but there are many people with the personality and the will to do this. I applaud them!
The second way is to grow your income overtime and as you grow your income portion at least half of the growth directly to long term savings. This is the savings you will not touch until retirement and will invest to achieve the benefit of the time value of money.
This is my favorite way of getting to the 40% rule of thumb.
Some Tips for Growth:
► Look for ways at your business or job to add extra value…you will be rewarded even if you have a stingy employer as there are always employers looking for value creators.
► Look for people making the amount of income you are looking to achieve and pay attention to what they do…follow them, success leaves clues!
You’re never too young to start saving for your future! Saving should be an important priority no matter what age you are because if you don’t plan, then there’s nothing but trouble waiting around the corner.
The ‘Time Value’ of Money
Here is how time value of money works... A simple example is, say you begin saving at age 25, putting away at least $3,000/year for 10 years in a tax-deferred retirement account. At the end of that 10 years, you stop investing completely. When you reach 65, your initial $30,000, growing at a 7% annual return, will have swollen to $338,000 even though you stopped investing at 35. By contrast, if you were to put off investing until age 35 and invest $3,000/year for 30 years, your $90,000 investment will only be worth $303,000 at the same 7% annual return.
The study of the time value of money will be of great benefit as a strong understanding of interest and compound interest play an integral role in the time value of money. Starting young with good investing habits can help set up your future for the retirement you desire.
