One mistake many people make today is failing to save and invest early in their career. The typical excuse these people have is that they don’t make enough money to save early in their working lives. Individuals just starting their career should set aside the maximum contribution they are able to make. To give an example of just how valuable time is let’s look at two scenarios: Person A starts investing at 25 and is planning on working for 40 years before retirement. She starts investing $250 per month at a 12% rate of return. By the time she enters retirement she will have approximately $2.9 million. Now let’s imagine a second scenario where Person B delays investing until he turns 30. At age 30 he starts investing $300 per month and plans on retiring in 35 years. When he enters retirement, he will have approximately $1.9 million in investment income. As demonstrated, even if you invest more monthly than someone who started five years earlier, you will be worse off in the long run. If Person B had invested even a fraction of that $300 earlier and then increased his contributions in five years, it would have had a profound difference in his funds available at retirement. Investing early has more benefits than the obvious time value benefit.
Investing early in your career when there is less disposable cash available, you learn to be more disciplined in your finances. When you include investment spending in your budget, you have to trim your spending in other areas, forcing you to be more frugal when spending.
Learn from your mistakes; a young investor may make a bad decision when investing. The good news is that young investors have a lot more room to take risks, hoping the payoff is high but able to absorb the loss if it is not. The added benefit of making a mistake early in your career is that you will have plenty of time to recover. If someone made the mistake later on when they had much more money in the game, the loss could be devastating.
Build a comfortable cushion. When you begin to invest early, you can have a peace of mind that your savings will be of good use in the event of an emergency. Having that cushion adds greater security and quality of life which will help you achieve your financial goals for the long run.
Contributing to a 401K plan is a great start to securing your financial future. At Paladin, we recognize the importance of investing for the future. That is why we offer competitive 401K plans for all of our employees and match contributions of our employees. To go beyond 401K plans, you may want to consider contributing to an IRA, where your money grows tax free. A traditional IRA is a tax deferred retirement account. You pay taxes when you start making withdrawals from it at retirement. A Roth IRA is a retirement savings account that is funded with after tax dollars. This means at retirement, you pay no taxes. Like anything else in life, starting a behavior early will help to build a lasting habit. When you invest early, you also get the added benefit of time value; allowing your savings to grow. There’s no time like the present to begin building a strong financial future.