The Benefits of Starting Young
Over the years, I’ve noticed that many people do not save for retirement until they are well into their working lives. Often times, people don’t even start saving until they’re in their mid- to late-twenties. Having a father who is a Certified Public Accountant, I was made aware of the benefits of saving while I was young.
While you are young, though you earn less money, it’s taxed much less. Last year, for example, I got basically all of my Federal taxes back. Since I’m taxed at such a low bracket, the money I made last year (and the year ending this April 15) is good to invest in a tax-exempt account, like a Roth IRA. These accounts are nice, because the money in them can grow tax-free. I don’t have to worry about paying taxes when I take my money out, and I don’t need to worry about paying a penalty so long as I don’t take out more money than I put in the previous year. This makes it a great savings tool for the long run - retirement - and also good for other things like a down payment on a house, though personally I will invest my money differently.
Once you have any earned income, you can put money into your Roth IRA; as much earned income as you have. By putting money into my Roth IRA for the past few years, I essentially have a huge amount of money waiting for me when I am 60 even if I don’t add any more money for 40 years.
Another benefit of saving money early is to help keep yourself out of debt. While I strongly encourage everybody to live well within their means, sometimes there are unexpected emergencies that can cause hundreds or thousands of dollars - car problems, health issues, etc…by saving money early, I’ll be more prepared to handle tough financial situations in the future.
On average, Americans typically spend more money than we make. Certainly this is obviously not true for everyone, hopefully everybody who reads this, but it’s still a scary statistic. Putting away 2%-5% of your gross income can greatly help you accomplish future goals, and will give you peace of mind by knowing that you’re financially secure.
In the meantime, I’ve found that the Roth IRA calculator at DinkyTown.net is a good tool to see roughly how much you may have in your Roth at retirement. If I don’t add anything else in, I will have about $188K assuming a 9% return rate. Not bad, for not throwing any more money in there; so just think about how much that’ll grow when I do add money each year!