Although it may be decades until you retire, it may sound cliché to start the earlier the better, but it is 100% true. The longer you wait, the less you will have in your account to compound over the next few decades. By missing out on contributing a couple hundred dollars a month could be missing out on a few hundred thousand over time. If you can make the sacrifices early on to free up extra money, the money you are contributing will feel like less of a burden so you can invest in your future.
Build an Emergency Fund
You never know what life will throw at you, so it’s always good to be prepared for the unexpected. Instead of throwing an unexpected charge on a credit card when you don’t have the money, you risk going into debt, possibly taking years to pay off with interest accruing every month. If you can put a few months’ worth of expenses in an account for an auto repair, home appliance upgrade, or even medical bills, you can have money available if you ever need it.
Compare Roth vs. Traditional 401(k)
Now while your emergency fund is important, you want to make sure that you are not leaving too much in there, otherwise it will not earn anything with the very low interest rates of a savings account. From there you should be saving for retirement, whether that is a Roth IRA or employer 401(k) account. With a Roth IRA you can contribute after taxes so that you can withdraw tax-free in retirement, while 401(k) will be taxed later, but reduces your taxable income to save on your income tax now. That will depend on your situation whether it is better to worry about taxes now or later.
Don’t Leave Free Money on the Table
Speaking of employer based 401(k) accounts, you could be able to take part in company matching contributions, some even match up to 6% of contributions. If you make $50,000 a year, that would be $3,000 that you and your employer would both contribute, for a total of $6,000. By contributing less than 6% you are leaving free money on the table that not only are you investing, but missing out on the company match investments would could be a huge hit if you figure missing that amount compounding over the next few decades.
Leave it Alone
When you see the amount of money piling up in your retirement account you may be tempted to use that money to pay off debt, use for a down payment for a house, or even take out for a vacation, but you could seriously be jeopardizing your future by taking this money out. By removing this money if will not be earning compound interest over time, so figure if you wipe out your account, there will be nothing there to grow. Instead, it’s better to do the old-fashioned way and save up for big purchases, not to mention continuing to contribute to retirement accounts even if you are paying down credit card balances, as it will help you over time.
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