What’s the first thing you should plan for early in your career? Retirement! You should begin making preparations immediately, and we’ll tell you why.
Compound interest—a great instrument only if you start early—explains why you should save for retirement in your 20s. Compound interest rewards you for both your capital and your earnings (your interest). Numbers simplify financial jargon:
Say you contribute $5,000 to your retirement account every year from 25 to 65, totaling $200,000 over 40 years. History demonstrates compound interest can save you approximately $1.1 million. Incredible, right? Starting early makes it possible.
For example, you wait a few years and start saving at 35, continuing until you retire at 65. Your 30-year donation is $150,000. However, because you missed those first 10 years in your 20s, you would have ended up with about half of $1 million because your investment had less time to compound interest.
Person B had nearly $550,000 less at 65 since they waited 10 years to start saving.
Retirement seems so far away, and there are other responsibilities like rent, car payments, and student loan debt payments, so most people don’t start saving in their 20s. The amount you contribute to a 401(k) plan is automatically taken before it enters your bank account, so you never have to budget and save it. Set it up on your first day of work to start saving for retirement without thinking about it. Then, with every paycheck, you never have to decide whether to save or spend.
Ask if your employer matches your 401(k) contributions up to a specific percentage. Since your employer’s match doubles your savings, take advantage of it. Saving for retirement in your 20s may feel like a waste of money. By saving even a tiny amount early on, your money may compound exponentially. Investing early may make you more comfortable and provide you with the financial flexibility to live the lifestyle you want 40 years from now.