So many people wait to start saving for retirement. If people only knew the magic of compounding and what it can do for their investment and savings accounts, they would be amazed.
So, how young is too young to start investing? You are NEVER to young to start investing. Let’s take the common 23 year old who just graduated from college. If he/she has $1,000 currently saved and they invest $1,000 each year for 42 years (let’s say they retire at 65 years old) at an annual return of 8%, they would have accumulated $353,922.49. Now let’s say this person waits until they are 40 years old to start saving (which MANY people do and often later in life). Let’s take the $1,000 they currently have saved and invest $1,000 each year for 25 years (retire at 65 years old). Let’s give them the 8% interest like in the first example. At the age of 65, they would have accumulated $85,802.89. They would have saved $268,119.60 LESS than if they started saving when they were 23 years old and just out of college. COMPOUNDING WORKS MAGIC. USE IT!
Here is a compounding calculator for you to mess around with: Compound Interest Calculator
Get A Jumpstart On Your Retirement Savings
If you would like to jumpstart your savings, a great place to work some magic is your 401K account at work. Hopefully you have one and hopefully your employer contributes to it. So, if you have a 401K at work, JOIN IT! It’s money that comes out of your paycheck BEFORE taxes so you are not taxed on that amount. It’s simple a smart move. Put away as much as you can afford to put away and still live comfortably.
In 2008, the maximum contribution to a 401K is $15,500. Those over 50 years of age can contribute an extra $5,000 each year to “catch up”. Most people will not contribute the maximum amount of $15,500 or $20,500 if you are over 50 years of age. Let’s take this in another direction though.
Let’s say you run into some money. Maybe you win a smaller sized lottery. Maybe you got a settlement for some cold hard cash. Maybe you received an inheritance. If this is the case, start putting in the maximum amount to your 401K and live off of the money you have received from the lottery, inheritance, settlement or whatever other way you received the money. This will give you a NICE tax break come tax time and will get your 401K up and running. If you are younger, this allows this sudden flow of money to your 401K to compound which will help you tremendously in the long run.
So, it’s simple. Live like you normally would but defer as much of your paycheck to your 401K as possible and live off the secondary source of money you have. When you start to run low on the other income, switch your 401K back to something more manageable.
Happy Savings and Compounding!
