We All Love Free Money

This may be something you may not want to hear, but it is definitely something you should know – start saving now.  Retirement seems so far away, I know, but that’s an even better reason to start saving now.  Time is your most valuable asset.  20 years from now you will thank me - I’ll be waiting. :-)

I am going to introduce your new best friend, his name is compounding interest. 

Assume at age 25 you started saving $200 a month, earning an average of 8%.  By the time you are 35 you will have approximately $36,600. Age 45 approximately $117,800 and at age 65 you could have $700,000.  Remember, this balance is accumulated by only saving $200 a month.  Imagine if you increased your savings with every pay raise – you could have over a million dollars at age 65.  It can happen!   

I think I hear you saying, “I can afford to wait”.  Let’s take a look at what “affording to wait” actually looks like…

Assume you started saving the same amount ($200) but at age 35. By the time you reach 65 you could have saved approximately $300,000.  “Affording to wait” looks pretty costly to me.  

So now you are convinced you need to start saving… what should you do?

As an employee, typically full-time workers, you have access to some type of tax-deferred savings vehicle.  With this savings vehicle you can make automatic contributions from your paycheck, before or after taxes.  The funds grow tax-deferred until you are ready to make a distribution from the account.  Most have heard of 401(k) others may know of 403(b) (usually for teachers).  Truly these savings vehicles are trying to establish the same goal, but with a different name depending on your employer. These accounts are to set money aside for retirement and watch it grow tax-deferred.

Where does the free money come into play?  Well besides the power of compounding interest (your money working for you), most employers will match up to a certain percentage of what you contribute to your retirement plan.  What do I mean?

For example, you contribute 6% of your $50,000 salary to your retirement plan.  Your employer may contribute up to 3% of what you contribute.  

•         You --> $3,000 annually
•         Employer’s 3% match --> $1,500 annually (FREE MONEY)

There may be a catch… Most employers will not contribute to your retirement plan unless you do.  Therefore, you may be forfeiting free money.

If you have no clue if your company contributes to your retirement plan or what kind of retirement plan you may have, I encourage you to speak with your human resource department. 

Bottom line:

There is no such thing as free lunch… not anymore… The lovely years of robust guaranteed pensions are long gone.

Generation X and Y will have to pay their own way in retirement.  Who knows how much Social Security benefits you will receive in 40 years.

Don’t wait.  Even if you save $50 a month, it’s something.  If you are far from your twenty’s and wish you started saving earlier, its water under the bridge – let’s get over it and start saving now. 

Stay blessed! 

Rianka D. 

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If you want to play around with numbers to see how much it will cost you to wait, visit http://www.dinkytown.net/java/WaitCost.html.  This is one of my favorite financial calculator websites.