7 Steps To Financial Independence (step#2)
“When should I start saving for retirement?”
That’s a question I hear frequently, and my answer is always the same: TODAY!!!
Regardless of how old you are, the best time to start saving is now.
Concerned that you can’t afford to save? Sometimes people feel that it is not worth saving anything if they can only afford to save a small amount, but the fact is that any savings is better than none, for three important reasons:
1. An earlier start gives you more time to reach your goal. Even if you are just putting away 1% per year, those contributions will begin to add up over time. So, as soon as you are earning any money at all, you should start saving, even if you are still in school or if you are still paying off student loans. Save as much as you can, as early as you can.
2. Savings is a habit. Just like diet and exercise, saving is a habit. It’s not easy, but once you form the habit, it becomes much easier to stick with it. You will quickly get used to living on your remaining income and won’t miss the dollars that are going into your retirement account. In fact, not only will you stick with it, but as you begin to see the benefits, in the form of a rising bank balance, you will feel energized to build upon this good habit and increase your savings. Many people who begin saving just 1% of their income soon realize that they can afford to put away 2% – thereby doubling their savings! A good strategy here is to increase your contribution rate every time you get a raise. That way you won’t ever see your paycheck go down, but your savings will steadily increase.
3. The most powerful reason to start early is the concept of “compounding.” In simple terms, compounding is money you make on the money you’ve made. Consider a simple example: Suppose you invested $100 in the stock market, and after one year it appreciated by 10%. It would be worth $110 at the end of that first year. Now, assume the market does the same thing the following year and returns another 10%. At first glance, you might think that your investment would increase by another $10 to $120, but you would be overlooking the $10 you made in the first year. You would gain 10% on both your original $100 as well as on the $10 you made in the first year – that’s the money you make on the money you’ve made. So, in the second year you will earn $11, not $10. That is the power of compounding, and that is the most important reason for starting to save today!