Okay, Ms. or Mr. Twenty-or Thirty-something, maybe retirement does seem light years away. Of course there are other things you want to save for, like the down payment on a house or your kids’ college educations. It’s tempting to tell yourself you’ll start saving for retirement in a couple of years when you’re earning more money, but putting off saving for retirement can be one of the biggest financial mistakes you’ll ever make. Why? Waiting to save can rob you of your greatest advantage: time. The sooner you start saving, the more opportunity your money will have to grow and compound. Compounding means earning interest or other investment income on your original deposit or investment. Even if you can put aside only a small amount from each paycheck, saving for your future early in your career may give you a big advantage at retirement time.
Don’t let the time slip away. Before you know it major life changes will be on the horizon. Your 20s are the time to start investing, and if you haven’t quite yet, your 30s are a prime time to readjust how you invest. Though each investment plan is individual, here are some tips to help you start investing in your 20s or adjust your investment strategies to fit your 30s.
Select an account option that fits your needs
For a young-saver or millennial generation the most popular account option is a Roth IRA. This is for many reasons like, contribution limits, flexible access for taking money out, and low tax rates. As an example, if you start making $5,500 Roth IRA contributions each year at age 25, by the time you are 65 you could potentially accumulate over $950,000, assuming you earn 6 percent annually. Even if you earn a more modest return of 4 percent annually, you would still accumulate over $565,000. The best part? Since it's a Roth account, you won't owe income tax on that money in retirement. It’s also attractive because if you are wanting to settle down and become a first-time homebuyer you can withdraw up to $10,000 of earnings tax-free.
Ramp up retirement savings
If you haven’t already been saving for retirement, now is the time to start. If you have, now is the time to ramp up the amount you’re saving. At least 15% of your income should be going to a retirement account.
Make investing and saving systematic, not sporadic
Automatic saving should be incorporated into the way you split your paychecks. Use direct deposit to automatically put savings away so you never have to feel the separation anxiety of watching money leave your account.
Your 20s were a time for risk taking and a sense of invincibility. Unfortunately, your 30s won’t have you feeling the same way. Installing a safety net in the form of insurance is one way to buffer risk that would otherwise be devastating financially.
Kid-proof your finances
Whether you choose to have children, already have them, or never plan to have any, child-proofing your finances is always a good idea. Children are costly, costing upwards of $10,000 a year in child care alone. Having that kind of buffer ready is a substantial boon to your finances.
Set your affairs in order
Wills and estate planning often only enter the picture after children do, but getting your affairs in order ahead of time helps mitigate any uncertainties that can pop up, financial or otherwise. Review these every five years to accommodate changes that crop up in the intervening years.
Although you may not be thinking about it now, you want to have an enjoyable retirement, right? Well, investing in your 20s and 30s can have an incredible impact on the amount of money you may have when you retire. Healthy investing habits can set you on the right track for the rest of your life and starting early in your 20s or 30s is the way to go. We all know we can’t travel back in time, so take advantage of the time you have to save now.
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