The power of compound interest, pay yourself first: how to save for retirement
Retirement is a time to relax and do the things that we enjoy or interest us. While retirement might seem like a long way off, eventually it will be right around the corner. Whether you have just started working or have been in the workforce for 20 years or more it is important to come up with a plan to save for retirement. Here are some tips.
Start as Early as Possible
The earlier you start saving for retirement the more money you will ultimately save. This is true not only because you will be saving more money over time, but because of the power of compound interest. Compound interest means that over time interest grows exponentially. For instance, you can put $100 a year away in your mattress for ten years and save $1,000. However, with compound interest, if you put that same amount of money away in a bank account earning 10% interest for 10 years, this amount amazingly grows to about $2,000. That is twice as much just using the power of compound interest.
Your Savings is obviously vital to saving for retirement. There is a popular term that is used in the finance circles and it is called “Pay Yourself First”. This is a good creed to live by. We make sure we pay the gas company, our mortgage, the restaurant, etc, however make sure you pay yourself before anyone else. Whether it is $20 per week or $200, saving money on your own can help you invest for your future once in retirement.
Most corporations offer their employees pensions, however don’t just rely on a pension for your retirement. If you looked at the paper this last year, many large corporations have reneged on their promises of offering a pension to their employees or the amount of the pension they give to their employees have been drastically reduced. Instead take advantage of another benefit your company offers- the 401K plan. A 401K plan allows employees to divert a percentage of their income in order to invest it in either company stock, money markets, bonds, stocks or mutual funds. The great part about 401K plans is that these plans are taxed when your 401K is cashed out, not before when this money can help your investment grow. This means that you get more bang for each dollar you put towards your 401K plan since it is not taxed up front and helps increase the power of your investment.
Investments outside of savings and a 401K plan can help you save for retirement as well. However, it is important to be very careful not to choose risky investments. One investment that has shown promise throughout the decades is real estate. Your home or purchasing a second home for investment purposes can be a great tool in helping you save for retirement.
If you are looking to maximize the amount of money that you have at retirement in order to do the things that you always dreamed about, it is important to carefully plan your retirement and choose strategies that will deliver in the long term.