Start Saving Now and Retire Sooner
By Sarita Harbour
Despite what your parents think, retirement doesn’t depend on age. The fact is, you can retire whenever you have enough savings, no matter what your birth certificate says.
Read on to find out why now’s the time to start saving, and how a simple thing called “compounding” can help you retire sooner.
Start Small So Your Money Can Grow
Even the smallest acorn grows into a big tree with the right conditions. So don’t skip retirement savings because you think your “nest egg” is too small to begin. Start with what you have, and let the magic of compounding begin.
The Merriam-Webster dictionary says compounding is “to pay interest on both the accrued interest and the principal.” So think of compound interest as interest paid on the money you save, and on interest those savings already earned. Yes, you can earn interest on interest. It’s a beautiful thing.
The sooner you start, the sooner compounding begins. And the longer your savings compound, the greater they’ll grow.
Here’s an example: Let’s say you start with $500, and add $100 per month to a conservative retirement savings plan paying 5% interest compounded annually. After 20 years, you’ve contributed $24,500. Yet your account could be worth as much as $41,019 due to the compound interest earnings of $16,519. Utilize tools, like Nerdwallet’s compound interest calculator, to gauge your savings plan.
Set It and Forget It
Sometimes, life gets busy and we forget about the repetitive tasks even though we know they’re important. Other things take priority, and we procrastinate. Saving for retirement is one of those things. If you don’t prioritize savings, you could even spend the money before you save it. Luckily, today’s technology can help protect you from your own bad habits. Hooray for automation!
Decide on how much you can contribute then automate your regular bi-weekly or monthly savings. This way you don’t have to remember to transfer money between your checking and retirement accounts. Automating retirement savings lets you save time, money and energy that you can then spend on experiences and activities important to you. Instead of adding yet another item to your “to-do” list.
You could just set it and forget it. Or to scale your savings goal, upsize it each year, or each time you get a raise. Either way, automation makes it easier to build savings. You aren’t tempted by the decision to save or spend every month — your contribution automatically goes to retirement savings.
Play It Safe Then Add Some Spice
Sometimes, people don’t want to invest because they’re concerned about risk. They’re afraid they’ll make the wrong investment choices and lose the money they’re working so hard to save.
The truth is that all investments, including stocks, bonds, and even cash have various risk levels. The good news is you don’t need to put all your savings eggs in one investment basket. Instead, you can diversify your savings. Diversification refers to holding a mix of different types of stocks, bonds, or mutual funds.
Play it safe and keep it simple by starting out with a lower risk option, like a fixed income mutual fund and a CD. Then as your confidence and knowledge grow, you may choose to spice up your retirement investments with a more diversified balanced fund to take advantage of some potentially higher yield investments.
Where to Find Money for Retirement Savings
Finding money to invest in retirement can be tough when you’re juggling expenses like rent and student loan payments. Yet it often takes just a few minor lifestyle adjustments to save a couple of dollars a day — which then frees up $50 to $60 per month towards retirement savings. Or jumpstart your retirement savings by selling some items you no longer need.
Simple Savings Tips to Try
- Sell used textbooks, gently used sports equipment, clothing, and small kitchen appliances online (try a local Facebook group or Craigslist) for quick cash.
- Contact your cable, internet, and smartphone providers to negotiate a lower rate when a competitor offers a deal. You may save a few dollars each month to funnel towards retirement savings.
- Look for student or alumni discounts everywhere. Then earmark the money you save for retirement.
- Committing to start saving for retirement when you’re young requires determination, discipline, and making some tough spending choices. Yet with compounding, automated contributions and diversified investments, you’ll be on track to retire young and enjoy financial freedom and the life you want.
