No matter how little you make or what your financial situation is, the time to start saving for retirement is now. Taking the step to start saving is crucial and the younger someone starts the better. Below, we’ll show you why starting earlier has such a gigantic impact. We’ll also talk about the power of good saving habits and offer some suggestions for what to do with the money once it’s being socked away. We’ll point out how budgeting and expense tracking can help, and steer you toward some good apps to help with each of those.
Start Saving Early for a Much Bigger Impact
People who start saving early can see a difference amounting to millions of dollars.
It’s crucial to start saving early. Let’s look at two saving scenarios. In the first, a man starts putting away $100 a month at the age of 20. In the second, a man waits until he’s 40 to start saving $100 a month. How much will each man have by the time he’s 65?
If we just do the simple math, the man who starts early will have $54,000 and the one who waits will have $30,000. A big difference, but not shocking. Multiplying $100 x 12 months x 45 years gives a $54,000 nest egg, and $100 x 12 x 25 is $30,000.
But adding up the savings is only part of the picture because of compound interest. Compound interest is the idea that whatever someone saves can be invested and can earn a certain amount of money annually. Then that money is re-invested and earns the same percentage the next year, and so on. Over time, the force of compound interest is quite powerful. Let’s look again at our example to see how powerful.
Compound interest doesn’t just increase an investment by a percentage. If that were so, the $54,000 invested at 6% would be $57,240 ($54,000 + 6%) and the $30,000 would become $31,800 ($30,000 + 6%). But compound interest doesn’t work that way.
With compound interest, the $30,000 earns 6% each year, then earns 6% on what it earned the years before. The end result is that by the time the guy in our example turns 65, the $100 a month he started saving at age 40 has become $69,787.65. Almost $70,000, just from putting away $100 a month for 25 years.
That’s impressive. But let’s look at the guy who started early. His $100 a month, invested since age 20 at 6%, has become a staggering $270,609.70. That’s more than a quarter of a million dollars. It’s almost four times as much as the man who invested the same amount for more than half the time.
Start Saving More
In the example, the men only saved $100 a month. If they save $200 a month, the differences get even greater. The man who starts at age 20 has more than $540,000 by age 65. The man who starts at 45 has less than $140,000. If they each save $1,000 a month, the guy who started young has $2.7 million by retirement age, and the guy who started late has less than $700,000.
However, it can be hard to start saving. Those living paycheck to paycheck, those who are in debt or need to buy a house and those with children might feel that they can’t possibly start saving in that kind of situation. But read on.
Start Saving Small and Form the Habit
Just like with exercise and proper eating, it’s not about going all out, then running out of steam and giving up. It’s about habits. The important thing is to form the habit early.
Those who think they can’t afford to save should still save just a little bit each month. Don’t worry about the numbers yet. Someone who can only save $20 a month may wonder if it’s even worth the hassle. First, even $20 saved each month invested at 6% will grow to over $54,000 in 45 years. Not bad for hardly saving anything. Second, those who start the habit early will eventually find ways to increase what they put into savings monthly.
Incomes can be increased. Spending habits can be improved. Debt can be paid down. Maybe those things won’t happen right away, but when they do happen for those who’ve already started the saving habit, the saving gains momentum.
Start Saving for Priorities First, Retirement Later
What about those with college debt or credit card debt? Those with mortgages? Or what if someone doesn’t have a 3 to 6 month emergency fund socked away yet and they know they need one? Of course it’s important to tackle these things first, but it’s still a good idea to start the saving habit, even if it’s just a little every month. People who start saving early and form the habit have an easy time transitioning from throwing money at paying down their debts to throwing it at the savings they’ve already started. When the debts are finally paid off, they know exactly what to do with the money they’re no longer using for those monthly payments.
Budgeting and Expense Tracking Tools
For people with money problems like debts and other pressing financial commitments, even squirreling away $10 or $20 a month can seem impossible. For them, budgeting and expense tracking can be a big step along the road to start saving.
There’s an old axiom that “What gets measured gets improved,” meaning that it often doesn’t take a lot of effort to improve a thing. Many times, all that’s needed is to start measuring something. Once something’s getting measured, human nature will make small adjustments to improve it on a continuous basis, almost without noticing it’s happening.
Expense tracking can bring this power to bear on someone’s spending. Anyone who regularly measures their spending will most likely improve it. For example, someone who spends $500 each month at Walmart will probably start trying to chip away at that figure.
Expense tracking can be difficult because it can require keeping track of several accounts at once. Luckily there are a lot of good apps out there for tracking expenses, many of which allow consumers to import transaction histories directly from credit and checking accounts to get a picture of their monthly spending. For our article on the 8 Best Expense Tracking Apps, click here.
Beyond expense tracking, budgeting is the idea of giving every dollar a job before it comes in through the door. The idea here is that every dollar that’s not spent consciously will be spent unconsciously. Budgeting can go past expense tracking to show consumers where all their money is going and where it should be going. Budgeters have an easier time saving because they can plan for it in advance. For our article on budgeting, click here.
How to Use Savings Plans to Start Saving
Anyone whose employer has a 401K program can start saving there. The money will come out of every paycheck before it’s printed, so it’s never even missed. Also, most companies will chip in matching funds, so someone who doesn’t take advantage of their employer’s plan is effectively throwing free money out the window. Another bonus with 401K plans is that the money is taken out of pay before taxes, which makes the saver’s yearly tax bill smaller.
Those whose employers don’t offer 401K plans can arrange to have a small percentage of their paychecks direct deposited into a separate savings account each pay period. Out of sight, out of mind. These people can make yearly contributions from the separate savings accounts to IRA accounts. Money put into IRAs is tax free and can grow until retirement.
After You Start Saving
Whether someone puts their savings dollars in a 401K or IRA, they’ll still want to invest them somehow. Money that’s just put into a savings plan with no investment can’t take advantage of the power of compound interest to grow the savings. Someone who is only saving a little at first should look for a large national brokerage firm that accepts small accounts and has low fees.
For people starting early, an investment company’s adviser will probably suggest a fairly aggressive strategy. This might include a mix of 70% stocks and 30% bonds. Stocks are risky, so a 70/30 stocks/bonds mix carries a fair amount of risk. Young people can usually handle more risk because they have more time for their investment to regrow after a stock market crash. The 30% in bonds prevents them from losing everything.
As an investor ages, it’s a good idea to be a little more conservative. As someone nears retirement, he or she might flip the mix the other way, and put 70% in bonds, the rest in stocks.
As You Go Forward
Savers can increase the amount they save by earning more. Earning more might take some time, but when it happens, those who have built the saving habit will be ready to put away the added cash in the right place.
Again, it’s all about the habit. Get it started now. If something as simple as smoking one little cigarette every now and then can cause so much damage, then think what the force of habit can accomplish if you take control and aim it in the right direction with your finances.