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You have a lot on your plate when you get out of school and start your career. Not only do you have the stress of starting your first real job in the workforce but you have all kinds of bills to consider. Most of them were not that big of a deal in college.
Now you are paying for your own living arrangements. You probably have student loans (the average debt is now over $27,000). There are transportation costs along with your everyday living expenses. Plus if you are just getting out of college where you probably had the time of your life you will most likely still have the itch to go out and have some fun on the weekends.
Add this all up and saving for the future comes in almost dead last on your list of priorities, right below going to the dentist and getting your teeth cleaned. No one cares about planning for the future and saving for retirement when they get out of college. That forces you to think about getting older and when you are young and carefree that can be kind of depressing.
Most of us just put it off for another day and decide that it will be much easier to start saving once we are older and make more money. The usual line of thinking is that you can wait until you are actually ready to start saving and actually know what you are doing. Unfortunately, this is the exact opposite of what you should be thinking.
Don’t Wait to Start Investing
In fact, when you get out of college and enter the working world it will be the best time to start saving for retirement. Even though you have all of these new costs and worries you actually have some advantages at this stage of your life.
First of all, if you are just starting out you have no frame of reference to make comparisons with your starting salary. Unless you had an investment banking or computer science internship that paid really well, this will be the most money you have ever made. By saving and investing right away you will never even notice that the money is gone because you have no previous experience making a salary.
By starting right away you are developing the correct saving habits that you will need to build wealth over your career. It would be nice to get a couple of huge payouts instead of saving money periodically over time, but if you look at the actual success stories of average millionaires they have taken the slow and steady approach of investing with a long-term mindset.
Taking the “wait until I’m ready” approach doesn’t work. Here’s why. Once you progress in your professional and personal life you will want to increase your standard of living. That means spending more money on material possessions. Once you get married and decide to settle down and have a family you will have to buy a house and all of the related costs that come with home ownership. And we have all seen similar stats that show a middle-income family will pay about $235,000 to raise a child.
The moral of the story is that you will never be ready to start saving if you continue to wait until you are “ready.” Start when you are young and have the ability to adapt and create the right behavior to make a lasting impression on your future decisions.
Another reason to start investing when you are young is because you will have the wind at your back through the power of compound interest. This simply means that the longer your investment time horizon the better chance you have of increasing your portfolio value by earning interest on interest and building wealth.
Let’s look at an example to see compound interest in practice. Assume that Chet starts saving $500 a month at age 25 and does so throughout his career until he retires at 65. Assuming a 7% annual return on his investments he would end up with a nest egg of almost $1.3 million. Not bad considering he only contributed $240,000 to his investment accounts in those 40 years.
But what if Chet waits until he is 35 and “ready” to start saving. If he still saves the same $500 a month and earns 7% a year he would end up with just over $600,000. Not bad, but still less than half as much as if he would have started at 25. Plus he put in $180,000 which is not that much less than if he had started in his younger days.
How Do I Get Started?
The number of choices that you have to make can be overwhelming, especially since you probably have very little knowledge of stocks, bonds and other investments. Plus you have to open the correct accounts and decide how much to invest. It can be challenging.
Keep it simple and don’t worry if you don’t have the financial knowledge yet. You need to start saving on a periodic basis. That will get you 80% of the way there and you can learn the rest as you go.
Sign up for your company’s 401(k) plan and make sure you invest enough to get at least the company match. That works out to as an easy 100% return on your money. You get the added bonus of having the funds automatically taken out of your account every time you get paid so you never actually get the chance to spend the money. You can then increase the amount you save over time as your pay rises.
Most plans have a default option of a target date retirement fund which will be diversified by asset class and have a professional investment manager making the decisions for you. While it’s not the perfect investment vehicle it will get the job done. Don’t worry about making the perfect investment just the right decisions that minimize your mistakes.
If you would like to learn more about other investment choices you can study up and diversify from the target date fund it you like. For most investors that don’t want to pay much attention to their portfolios a target date fund should do the trick.
Don’t wait until you are ready to start saving because that day will probably never come. Start right out of the gates and you will develop the correct saving habits to build wealth over the long haul. It takes time and a little effort but it will be worth it when you are sitting on a nice pile of cash in retirement.
This was a guest post by Ben Carlson from A Wealth of Common Sense. Ben writes about personal finance, investments, investor psychology and using common sense to get ahead financially. You can follow him on Twitter or send your questions by email.
Image Attribution: Tax Credits