Why investing early pays off
Tuesday, 15 December 2015
When you're early in your work career, it's easy to put off investing money for far-off goals such as retirement.
Whether it's a tropical vacation or new car, there's always something more immediate vying for your attention and funds. But saving and investing even a small amount early on can pay off in big ways later down the road. You'll accumulate more toward your ultimate goal, and you'll create a habit that actually makes the process of putting away money easier.
"You have to put yourself first and that includes caring for your future self," says Denise Winston, personal finance expert and author of It's Your Money: Costly Mistakes to Avoid.
Time really is money
The biggest advantage of investing sooner rather than later is the magic of compounding returns. Basically, you make money off your investments, then those earnings are added to your principal, rapidly accelerating the growth of your assets.
The more time you give those assets to grow, the better. "Money makes money makes money," Winston says.
Take the example of two investors. The first puts away $5,000 in a retirement account when she's 20. The second saves the amount, but not until she's 30. By the time the investors are 65, the first has almost $45,000, while the second saver has $27,500. Starting early meant earning an additional $17,500 on the same amount of money saved.
The differences are stark when if the women continue to save throughout their career. Consider what happens if they both add to that initial $5,000 savings with annual contributions of $1,200 going forward. The woman who began saving at 25 would have $246,000 by the time she retires, while the woman who started saving at 30 would have $141,000.
Create a healthy habit with savings and investing
Though it's easy to see the benefit of investing early, few people do. In fact, less than half of workers ages 25 to 34 report that they're currently investing savings for their retirement, according to the 2014 Retirement Confidence Survey from the Employee Benefit Research Institute.
Winston says the key is to make saving and investing a habit. "You want to develop it early, and then you get addicted to having that money and watching it grow," Winston says.
She recommended three ways to make getting started easier:
1. Automate your savings
Create an automatic deduction from your checking into a retirement savings or other investment account every month. "Put it on autopilot," Winston says. You won't have to think about doing it, and you'll become accustomed to not having access to those funds.
2. Take advantage of free money
Make sure you save enough to make full use of any retirement contribution match your employer offers. For example, if your employer provides a 50% match on all your contributions up to 6% of your salary, make sure you're saving at least 6%. "Don't leave money on the table," Winston says. That includes making sure to also take advantage of other employee benefits that save you money (which translates to more money you can save) from discounts on gym memberships to reimbursed expenses.
3. Save your raises
Immediately increase the percentage you're saving with each pay raise. You'll accelerate your savings even more, and you won't miss the funds if you didn't use them in the first place. "If you don't claim that money right away, something else will," Winston says.
Winston challenges young people to think about saving and investing as not taking money away from what you want, but instead giving it to yourself. "You have to think about your dreams and what they are," she says. "Because investing is really about getting what you want."
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