National Savings Day is a day dedicated to something most of us know we should do more of and it can be a source of anxiety. Saving money often feels like a chore we put off – like organizing the garage – but here is the good news: Starting a solid savings plan early in life can be much easier and less painful than you think, and the payoff can be huge!
In the wise words of Albert Einstein, “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.” What’s so magical about compound interest? It’s like a snowball rolling down a hill and once it gets started, it just keeps growing, and the earlier you start, the bigger it can get. That’s why saving early is one of the best financial moves anyone can make.
The Easiest Way to a Million Dollars
Do you want to know perhaps the easiest way to save $1 million by retirement? Let’s consider two fictional people, Sarah and Bob. Sarah starts saving $7,000 a year at age 25 and does that for the next 10 years but then stops saving altogether after that. Bob, on the other hand, waits until he’s 35 to begin putting away $7,000 per year and continues to save that amount every year until he turns 65. Let’s assume that they both earn an 8% annual return on their money.
The result: Sarah has saved a total of $70,000 for a period of 10 years, while Bob has saved a total of $210,000 for a period of 30 years. The amazing thing is that at retirement (age 65) Bob would have about $793,000, while Sarah would have a little more than $1 million! This is the beauty of compound interest. The earlier you start, the more time your money has to work its magic.
If you are a young saver or want to help your children with their saving, here are some simple, effective strategies that can be put in place now and have a big difference down the road.
Pay Yourself First
One of the most effective ways to save money is to "pay yourself first." This means you should automatically save part of your paycheck (10-15% is a good guideline) before it's even available to spend in your bank account. Many payroll systems allow for direct deposits into multiple accounts, making it easy to funnel money straight into savings before it hits your checking account. Out of sight, out of mind, and into the future!
Take Advantage of Employer Matches
If you have access to a company retirement plan, make sure you are taking full advantage of any employer match. Many employers will match a portion of what you contribute to your retirement fund. Think of it as “free money,” and no one should leave free money on the table!
Start a Roth IRA Early
For young adults, a Roth IRA is one of the most powerful retirement savings tools available. Why? Contributions to a Roth IRA are made with after-tax dollars, meaning that all future withdrawals in retirement are tax-free. That’s right: Every penny that grows in a Roth IRA can be withdrawn in retirement without having to hand any of it over to Uncle Sam.
Compared with a Traditional IRA, which gives you a tax break up front but requires you to pay taxes on withdrawals later, a Roth IRA is generally better suited for younger people who are likely in a lower tax bracket now than they will be in the future and have a lot of time for the money to grow tax free.
Roth IRA Rules (and a Little Help from the Parents)
A person can contribute up to $7,000 a year to a Roth IRA in 2024 (or $8,000 if they’re 50 or older). The only catch is that you need to have earned income to contribute. If your child is just starting out in the working world and doesn’t have much extra cash, consider gifting them money to contribute to their Roth IRA. As the example above pointed out, starting to save at age 25 instead of age 35 can make a huge difference. This can be a fantastic way to help them get ahead on retirement savings and maybe they'll even thank you for it one day.
As we celebrate National Savings Day, let’s all commit to saving a little more, starting a little earlier, and watching our money work for us. Because, as Einstein so wisely noted, the real wonder of the world is letting compound interest do the heavy lifting. If we can assist you with your financial planning, reach out to us online or call (515) 225-6000.
