Save Early
Most people don’t truly understand the idea of compound interest. For example, do you know off the top of your head how much $1000 would be worth by the time you are 65 if invested when you are 20? Assuming an 11% return (average return of the stock market over the past 30 or 40 years), that $1000 would grow into $109,000.
Now if you invest that same $1000, but you wait until you are 40, it is only worth $13,000. In fact it will take about $8,000 invested when you are 40 to catch up with the $1,000 invested when you are 20.
These numbers illustrate why it is so imporant to start saving early on in life. Actually these number underestimate your possible growth because many companies offer some type of matched savings plan in their 401k or 403b retirement plans. When you put money into these plans the company will put in extra for you. Usually it is somewhere between 2% and 10%. Additionally these types of plans allow you to put in money before you pay taxes on it. That means you end up with savings of 10% to 38% automatically.
If the 20 year old in our example worked at a company that matched up to 7% in retirement, he would be able to add an additional 70 dollars when he invests the $1,000. However by the time he is 65 that 70 dollars will have grown into more than $8,000.
Take the time to find out what types of retirement plans your current employer offers. Even if your employer doesn’t offer a 401k or 403b, you can still benefit by using an IRA (individual retirement account). This is a special account that the government lets you put money into tax free.