7. Start a retirement account. It’s almost become a tiresome cliché in personal finance books and blog posts, but it doesn’t make it any less true: time is your biggest ally when investing. To show you the power of time on your investments, let’s look at an example from the book Get a Financial Life:
“Suppose you set aside $1,000 a year from age 25 to age 64 in a retirement account that earns 5% a year (historically, stocks return about 8%, but we’ll be conservative). That’s $39,000 total you invest. By the time you turn 65, you’ll have $126,840. If you don’t get started with saving until you’re 35, you’ll only have $69,760. Starting just ten years earlier would have doubled your total. Yes, doubled.”
Starting early with retirement pays off big time down the road.
So after you’ve started that emergency fund and after you’ve paid off that high-interest credit card debt, start a retirement account. If you have a job that offers a 401(k) plan, sign up. Don’t know which investments to fund your account with? Go with index funds. If your employer offers 401(k) matching, contribute at least the minimum amount for which you’re eligible to receive matching funds. But the more, the better.
If your job doesn’t offer a 401(k) or if you’re self-employed, open up a Roth IRA account. Your bank likely offers one or you can use an online broker service like Vanguard or Fidelity. Fund it with index funds.
Aim to contribute at a minimum 5% of your gross income to retirement. As you start to pay down debt and increase your emergency fund, bump up your savings rate.
For more information about retirement accounts, see our articles on:
- 401(k)s
- IRAs
- Index funds
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