We Got Into the Christmas Spirit By Opening a Retirement Account
Retirement accounts can seem a little underwhelming when you’re young. But make no mistake, they are important. Unfortunately about 1 in 4 Americans do not have money saved for retirement. My sister was included in that statistic until about a week ago when I halted the the family’s Christmas cookie extravaganza to guide her through the steps required to open her own Roth IRA.
She had recently started her own business and is making decent money. I asked her if she had set up a retirement account yet. She replied that she hadn’t. Being the money nerd (and loving brother) that I am, I set my cookie frosting tool down, walked to the bedroom, grabbed a laptop and began the registration process for a Roth IRA. My dad and I explained to her the benefits of investing her money as early as possible no matter the amount and walked her through her account, showing her how to deposit, making sure her bank account was properly connected and suggested a few ways to invest.
If you’re on the fence about investing into a retirement account, I’ve laid out some points below that may convince you that a retirement accounts are worth it.
1. Free Money
Many employers offer a 401(k). This is one of the most common ways to invest for retirement.
Some employers who offer a 401(k) also offer a 50% match (or more) on the money you invest up to a certain percentage of your gross salary.
In other words, if you invest 6% of your $50,000 salary (that’s $3,000), your employer puts in an additional $1,500 (50% of $3,000) for a total of $4,500 invested for the year. That’s a free $1,500!
Now, not all employers offer this deal, so it’s best to check with your company to see what your options are. Even if it’s not a 50% match, it’s still free money and it’s still worth it.
2. The sooner you invest, the more money you’ll make on your investments
Compound interest is pretty great. When you invest your money into accounts or assets that appreciate (go up in value) over time, the money earned on that asset gets reinvested over time. Now you’re earning new interest on the initial amount you invested plus the interest it’s earned. This process continues over time earning you more interest on your money.
Here’s an example. Say you make a $5,000 investment at age 25 into a retirement account that’s earning 10% compound interest annually. In 35 years, when you’re 60, that $5,000 will turn into $140,512.28.
Now, say you wait until you’re 30 to invest $5,000 with the same interest rate. In 30 years, when you’re 60, you’re only left with $87,247.01.
That’s $53,265.27 you missed out on!
With that said, time and patience are the most powerful factors in this equation. The longer you’re invested, the more interest you’re earning, thus, the more money you’re making.
Try out some scenarios for yourself with this compound interest calculator.
3. It’s riskier to save your money than it is to invest it
Preface: First, I want to say that I stand by a good emergency fund. If you don’t know what that it is, you can likely guess what it is.
An emergency fund is simply an amount of money that you have immediate access to that you can use in case of an emergency such as a car breaking down, the furnace blowing up, or maybe you get laid off from work.
Many suggest that you save at least 3–6 months worth of your living expenses for your emergency fund. I think it’s totally up to you how much you save but I do think you should have an emergency fund of some sort. Personally, if doubled down on frugality, I could probably afford 8–10 months on my emergency fund.
Explanation: When you save your money in a traditional bank or even a “high-yield” savings account, you’re earning peanuts as far as interest goes. In fact, you could be losing money in a savings account.
Inflation is real. Inflation is what’s potentially causing you to lose money when you keep it in a savings account.
An example — say you have $10,000 in a “high-yield” savings account that earns you a 0.50% APY (annual percentage yield — interest). In one year you’ll have earned a little over $50. That’s great and all, free money I suppose.
However let’s now consider that inflation is more than 0.50%, which it has been for the past ten years. In this scenario, after a year, while you’ve earned money, it can now purchase less than it could a year ago.
Here’s another nifty calculator that shows what buying power your money has from one point in time to another taking inflation into account.
Conclusion
Investing can seem like a pretty big risk. You’re throwing your money into accounts that you, in some ways, have no control over. However, with a little bit of research you’ll soon learn that investing your money is a smart thing to do.
Remember — the sooner you invest, the more money you will make over time.
Originally posted on my personal blog Personal Personal Finance
