February 14, 2019
When you’re in your 20s, 30s or even 40s, retirement may seem like a lifetime away—something you may not need to plan for just yet. But is it ever too early to start preparing yourself for a future of financial independence? Absolutely not. The best time to start planning for retirement is the day you get your first paycheck.
Starting your retirement preparation when you’re as young as 25 means you have time on your side to start building good habits and compounding savings. Here are four easy ways to start planning in your 20s to become financially independent in the future:
Start budgeting and record keeping.
The key to saving money is simple: spend less than you make. A vital habit to learn when you’re young that will follow you throughout your adulthood is how to live below your means. Your goal should be to live on only 85% of your income. The additional 15% should be put away into some form of savings or investments.
In the digital age, you’ve probably gone paperless across the board; you don’t write checks, receive billing statements or have a folder of receipts in your bedroom closet. But that doesn’t mean you can’t keep a record of your spending. There are countless apps and spreadsheet templates available to help you track your spending and income. Seeing exactly how much money you have coming in and out of your wallet will help you make smarter financial decisions.
Know and take advantage of your employee benefits.
When you start a full-time job, your employer will likely offer a range of benefits. Often, employers offer two types of retirement savings plans: 401(k)s and Health Savings Accounts (HSAs). It’s important to understand what these are, how they work and how to take full advantage of them.
A 401(k) is an investment account that, based on the state of the stock market, will continue compounding throughout your career. Contributions towards your 401(k) are taken out of each paycheck. Talk to your employer or read your employee handbook to find out if your company has a 401(k) matching or profit-sharing plan.
With matching, your employer will contribute a certain amount of money in addition to what is taken out of your paycheck. This is essentially free money. With profit-sharing, your employer can choose to distribute a portion of the company’s profits into employees’ 401(k) accounts in order to lower their tax liability.
An HSA works like a savings account and contributions are untaxed. The money in that account will compound over time and can be used to pay for any medical expense without being taxed when withdrawn.
One of the most valuable things you have in your 20s is time. It is far easier to grow money over 50 years than over 25. In any account that is either invested or accruing interest, having more time to let the money grow could mean doubling, tripling or even quadrupling your savings.
Let’s do some math to really understand this. Say you put $6,000 into a retirement account every year until you’re 65 and the account sees a 7% rate of return.*
Following that savings pattern and starting at 45, you’ll have $245,973 in your account when you turn 65.
Starting at 35, you’ll end up with $566,765.
Starting at 25, you will have $1,197,811 in your retirement account. By starting at 25, you’ve doubled your money as compared to starting at 35 and nearly quintupled your money compared to starting at 45. This is why you should start early!
Avoid adverse debt or have a plan to get out of debt.
Not all debt is bad. Debt used to buy a home or start a business has collateral and can be used as leverage. This can be good debt. Consumer debt is always bad. This includes credit cards, car loans and student loans. Because of high interest rates, making a habit of racking up debt when you’re young will only hurt you more and more as you get older.
The rule of thumb for staying out of debt is not buying anything you cannot afford. But in our imperfect world, that’s easier said than done. If you do have debt, or if you need to use debt for a major purchase, have a formal plan to get out of it.
One way to do this is by reducing your spending. Find places where you can cut costs responsibly, like getting a roommate, canceling the gym membership you keep telling yourself you’ll use or opting to make your lunch or coffee at home.
If you can’t reduce your spending, it may be time to try to increase your income. Seeking a higher-paid position, starting a second job or increasing your hours could bring in more money to help pay off what you owe.
If you’re asking yourself if it’s too soon to start planning for retirement, the answer is always going to be no. Start preparing as soon as you start earning an income and you’ll be better off in the future. The one thing you can’t make more of is time, and the one thing you can’t borrow for is retirement. Getting into the habit of saving money and making sound financial decisions while you’re in your 20s will follow you throughout your life and into your retirement.
To read the original article, please visit Forbes.com.