The average 20-year-old is in the process of finishing their college career, settling into their new career of choice and making decisions that will affect them for the rest of their life. What we suggest is that, while they are doing these things, they also start planning for something that may seem very far off in the distant future; their retirement.
Okay, we realize that retirement is some 40+ odd years away and that there’s certainly plenty of time to start saving but the fact is that, during your 20s, the financial habits that you create are the same ones that will (hopefully) set you up for a good life when your career comes to an end. Below are some of the best tips that we’ve come across over the years that can help you to do just that. Enjoy.
- Understanding how compound interest works and taking advantage of it now is probably our best piece of advice. By simply putting $5000 a year in a tax-deferred retirement account, an amount that equals just over $400 a month, you’ll have over $1.3 million 40 years from now. That assumes an 8% per year average which is rather high so let’s cut that in half and say that you’ll get 4% which is more likely. That still equals a retirement fund of over half a million dollars.
- Paying yourself first is a financial technique that most specialists will advise and so will we. Opening a 401(k) with your employer is one of the best ways to do that and having money taken automatically out of your paycheck every week is the best way to fund it. If your employer has a matching program you’d also be well of vice to take full advantage of it and put in the maximum amount that you can to take advantage of what is essentially free money.
- This might be the hardest pill to swallow but controlling your spending is absolutely vital if you want to have a comfortable nest egg when you retire. Simply put, the less money you spend in the next 30 to 40 years the more money you’ll have when you stop working. We’re not suggesting that you live like a pauper and eat beans and rice for the next 3 to 4 decades but simply make better spending decisions, put together and use a budget software app and take advantage of any and all opportunities to save whenever you . Once retirement comes around trust us, you’ll be glad you did
- Start educating yourself about your retirement options now, including all of the savings options that you have, the types of investments available and any other financial information that you can get your hands on.
- Pay off your college loans as fast as possible. The interest on college loans can make it very difficult to pay yourself first, put money in savings and build a comfortable retirement account. While it may mean making some sacrifices for a few years, the quicker you pay this debt the better off you’ll be.
- Make, and meet, smaller financial goals so that you become financially disciplined and create excellent financial habits. Pay off your credit cards in full every month, save for that new car and pay for it in cash rather than taking out a loan and try to resist using credit cards to make large purchases that you can’t pay off at month’s end.
- Try your best to boost your contributions to savings, IRAs and 401(k)s every year. Using the money from your bonus or pay raise is a great way to do this.
- Start diversifying your portfolio now. Even though you can afford to take a few more risks (and absorb a few more hits) right now, it doesn’t mean that your portfolio should be composed of 100% stocks. Simply put, a diversified portfolio will, in most cases, provide you with a better overall outcome by the time you reach retirement age.
- Turn financial organization into a habit now, while you’re still young. While you may pile your laundry in a heap on the floor and have three months’ worth of McDonald’s wrappers under the seat of your car, when it comes to finances, disorganization can be very costly.
Right now, while you’re in your 20s and your life and career are ahead of you, is the best time to put these tips and advice to work for you. Even if retirement is something that you really don’t want to think about, the habits that you create now will stick with you throughout your life and career and could very well mean the difference between a comfortable retirement and a retirement filled with financial stress.
If you have questions about retirement planning or concerns about your finances please let us know and we’ll get back to you with answers and advice.