As a young adult, there will be many financial decisions that you will make over a lifetime. These decisions will determine your financial picture that will carry you through life. One of the wisest decisions you can make is to start investing while you are young. There are several ways to do this. By making the right financial choices, you can make sure you are prepared for money challenges in life.
Current retirees depend heavily on the Social Security program that subsidizes retirement income. The Social Security program is weakening every year, as there are not enough workers to contribute tax funds to support the ever-growing retiree population. It is predicted that there will no longer be funds available by the time today's young workers are ready to retire. Young workers are well-advised to make their own provisions for income after retirement.
One of the best investment strategies is to open an IRA. An IRA or an individual retirement account allows you to save and invest during your working years and enjoy your earnings after you retire. Most young workers save with an IRA through their employer. There are, however, options available for the self-employed and young business owners.
If you own your own business or are self-employed, many banks offer the SEP-IRA (simplified employee pension) account that is great for freelancers and small businesses that hire employees.
The Power of Compound Interest
Albert Einstein once described the principle of compound interest as one of the most powerful forces in the world. While he may have been exaggerating, there is some truth to that statement. Compound interest, to put it simply, is the interest that your interest earns, month after month, year after year. If you put your money into an interest-bearing account, the money you earn in interest will also earn interest. This causes your money to snowball at a staggering rate.
One of the strongest advantages that you have is your age. A person who starts to save and invest at 20 has a distinct advantage over someone who starts at 30. The thirty-year-old would have to save almost double the amount of money of the twenty-year-old to earn the same returns at age 65. By starting when you are young, you can save less money and earn more in interest over time.
Saving now for your retirement is the best way to ensure that you will have enough money to live comfortably after your working days.
Wayne @ Young Family Finance says
Do you have other investment ideas for young people besides the IRA? What is your opinion on the 403b/401k? How much do you think 20-somethings should invest when it can be hard just to get by?
If you can put $2,000 into an IRA and return 15% annually on a consistent basis, you can turn that initial balance into over $1,000,000.00 in 45 years… and that’s without even adding a penny in additional contributions to your account. Inflation will surely weaken the spending power of those dollars, but still… Combine this with a good savings rate and your should be in pretty good shape for retirement. Oh to be young and have all those lovely compounding years in front…
By the way, the way things are going, retirement age in 45 years will probably be around 85, so you have a bit of time to save up that initial account balance… That’s a joke… the sooner you start the better… good for habit formation.
When you’re younger, you have more potential to get raises as you climb the ladder. One strategy that always works is to bump up your retirement contribution with each raise. You’ll eventually find yourself contributing a bunch towards your retirement that you never even ‘saw’.
This article didn’t really have any substance to it. It’s titled the best ways for young workers to save, and it says to either start a roth ira if you are not self-employed, or a sep-ira if you are self-employed. That doesn’t tell me anything.