Many of us have heard that an "early and often" approach works best when planning for the long-term growth of investments. The earlier you can prepare and contribute to retirement, the better. This approach is something I recommend for all clients. Still, it can create anxiety amongst people as they struggle to understand just how they can afford to consistently direct parts of their income to retirement accounts.
Often, we approach saving for retirement from the bottom up. We figure out all our household expenses and then debate whether what is left over should go to retirement or discretionary spending. I would challenge that approach and ask that people think about it in reverse. The first item to budget for is retirement, and then create a budget around that. If you go through this exercise, you will gain better insight into your finances. Retirement, which may be a long time from now, must be a priority, and this exercise makes it one. This approach will make allocating funds consistently to retirement accounts much more manageable while "paying yourself first."
This approach is one of my favorites because it is simple and works. At the start of our careers, we typically struggle to make ends meet. As time passes and salaries grow, we find ourselves getting more and more comfortable. This point in our careers is a critical time in many ways. When thinking about retirement, these raises present a fantastic opportunity. What if you decided to use that money to grow your retirement accounts instead of buying a bigger house (unless needed) or a fancy car? The effects on retirement accounts can be substantial. My suggestion: as soon as you and your family are on solid financial footing, don't "realize" those raises; direct that additional income to your retirement accounts. This takes discipline, and perhaps you must realize a portion of that raise, but the mindset is essential and will lead to long-term growth.
When we objectively view our financial health, we can recognize areas where we may spend money that we don't have to. Whether it's on clothing, restaurants, car payments, or streaming services, there may be areas where we can cut back and thereby significantly increase our ability to save. Cutting expenses doesn't need to be painful. A careful and objective evaluation should reveal areas where you can trim. Being thrifty is not the same as being "cheap," and understanding the ultimate goal will keep you on track.
Ensure that you are taking advantage of opportunities to bolster your savings further. Whether it be employer matches within a 401K, catch-up provisions within a qualified plan, or allocating social security benefits to do both, understanding how to supercharge savings is necessary.
"Every journey begins with a single step;" this applies perfectly in this instance. There is no better time to start than right now. No matter the investment's size, you must acknowledge the power of time and compound interest. What is compound interest? Put simply, it is "interest on interest." Say you invest $10 at a 10% annualized interest rate. You earn $1 in that first year, but for the second year, you earn slightly more ($1.10) because you now make 10% on $11. Do this repeatedly, and you will see exponential gains from compound interest. Critically, the number of periods (or years when considering retirement savings) is significant. The more time it has to work, the more you will see considerable growth due to compound interest. The bottom line is to get started in whatever way you can to take advantage of this mathematical phenomenon.
All I outlined is relatively easy to understand, and most of us know we need to focus on our retirement. It becomes an issue of inertia and making that first move towards breaking through it. With these simple steps, you can do just that and realize that the power to focus on your future took a lot less effort than you may have anticipated.
v 2.4.51 | © One Day In July LLC. All Rights Reserved.
