This will be a three part series that will be updated on Saturday’s (most likely) …..

Investing Young
Investing Young..Making Compound Interest Work

If I could turn back the clock and ask my parents, or teachers for that matter, to specifically instruct me on the world of personal finance, I would. Of course, until a time machine is built and tested, this isn’t happening. And, personally, I really don’t want to be 18 again. So instead, I’ve decided to share the advice I would have liked to have been given as a young adult. Here are my Big Three:

  1. It’s never too early to start investing – making compound interest work for you,
  2. Don’t be a slave to debt – using credit wisely, and…
  3. How finance charges work – using amortization tables for clarity.

Number One: It’s never too early to start investing – making compound interest work for you

One of the biggest mistakes I made when I was younger was putting off saving for retirement. It’s common to make this mistake when you’re in your early 20’s, thinking that you have lots of time to save for retirement. This was my thinking and I take full responsibility for my actions. Here is why this was not a good financial move on my part:

  • Compound interest works by compounding upon itself.  The longer it does this, the more money is made. If I had started saving for retirement when I graduated from college and started working full time around age 25 I would already have saved between $57,071 and $78,000 saved (based on interest rates ranging from 4-8%) had I contributed $3,000 a year. This is a huge start that I missed out on. The concept of compound interest is taught in calculus. I didn’t take calculus, I guess this is why I didn’t understand the beauty of it at a young age!
  • You might decide to retire earlier than 60 or 65. If you start saving at an earlier age, you could easily have over one million dollars saved by 65 or $600K by 58. Because I put off saving for retirement for so long, I can now only hope to have a little over $400K by 65 and less than $300K by 58. Those 13 lost years really added up!
  • Putting retirement savings off only leads to continually putting it off. Again, every year I put this off makes it that much more difficult to begin. This is the year I start!

Where to put your money – or at least a good start:

  • 401(k) – Some employers match a portion of an individual retirement account. Making automatic deposits each payroll period is the most efficient way to invest, and you’re less likely to spend the money you don’t ever see. The 401(k) investments are pre-taxed, so the deduction from your paycheck won’t be as noticeable.
  • IRA/Roth IRA – Another great way to invest that compliments a 401(k) is an IRA or Roth IRA. A traditional IRA or individual retirement account is pre-taxable, meaning you pay the taxes when you cash it out at retirement. With a traditional IRA, you can’t touch the money in the account until you reach 58 without a penalty. However, you must begin withdrawing money from it by age 70. A Roth IRA has some features that make it a little more flexible. You may withdraw money from it without a penalty for certain reasons such as 10% towards a down payment on a house. You may also continue contributing past the age of 70. Roth IRA’s do have income limits, however, and are taxable (some people view this as a positive, others as a negative aspect). If you make more than a specified amount,  you must convert it to a traditional IRA. With both IRA’s, the maximum annual contributions is $5,000, unless you are over 50 then you can contribute a little more annually. Some investors also like to view their Roth IRA as a college savings for future kids.

Though I’m getting off to a late start when it comes to retirement savings, I am lucky to have a pension plan in place. Now if only I could take my own advice and open an IRA by the end of summer (I must first pay off my crappy line of credit!)

Stay tuned for Part 2….Don’t be a slave to debt.

Anyone who has some great advice to add, please feel free!

4 Comments

    • @Mr. Credit Card – I kept it simple. If I had been bombarded with too much info, I would have definitely overloaded! 🙂

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