Coffee & Closers

“The most powerful force in the universe is compound interest“ – Albert Einstein

Put another way, the earlier you begin saving and investing has a direct and dramatic effect on the amount of wealth that you will have later in life. There are simple things that you can do that will have profound impacts on the amount of money and wealth you can accumulate over your lifetime. For example, if you put $5,000 a year into retirement accounts starting at age 22, and you earn an annual rate of return of 8%, you will have $1.5 Million at age 62. If you were to wait to begin investing until age 32, you would accumulate less than half that amount. And the more you contribute simply amplifies the compounding. The most advantageous financial decision you can make at a young age is to save and invest early. There are many ways to do this, and I have included some tips below along with some other important financial tenets to follow throughout your 20’s to help ensure financial freedom.

Utilize Your Employer’s 401K Plan: Most large companies offer matching programs for retirement contributions made by their employees up to certain thresholds. So if you contribute a certain percentage of your paycheck to your retirement plan, say 6%, your company will contribute that much as well. If you do not take advantage of this, you are literally leaving free money on the table. You are willingly forfeiting a free bonus, in this example a 6% annual bonus. To the extent that you are capable of contributing more – do it. While you’re not getting matched with company dollars beyond that specific threshold, you are still investing money on a pretax basis and reducing your annual taxable income.

Invest: If you have already maxed out your 401k contributions, or your employer does not offer such a plan, or you simply want more robust investment options, a Roth IRA is a very powerful tool. This allows you to invest and have your earnings grow tax free until retirement. While you can only contribute $5,500 per year to this vehicle, this is another fantastic way to begin accumulating financial assets. Another benefit of a Roth IRA in comparison to a traditional IRA is that you may withdraw your contributions penalty-free at any time for any reason. This is yet another reason to begin investing today.

Automate Your Savings and Investments: Set up your paychecks so that the money you intend to save and invest gets automatically deposited into your savings and investment accounts. This will help you establish a routine and budget your expenses. Even in this is only 5-10 percent of your paycheck and it seems insignificant to you, it will compound over time. I would encourage you to save and invest as much of your income as you can, and many investment professionals stress the 80/20 rule; Live on 80 percent of your income, save and invest the rest.

Build Credit: Good credit is essential for achieving favorable financing throughout your life. Your credit rating helps determine rates on auto insurance, credit card interest rates and mortgage rates. Credit cards are good ways to establish credit. Never carry a monthly balance and pay the amount in full each month to help ensure a good credit rating. Having no credit is not as damaging as having bad credit, but it can still severely hinder your ability to secure a large home or auto loan.

There are many ways to achieve significant wealth. In my day job I manage money for some very wealthy people, and many of them can attribute much of their wealth to being diligent and savvy champions of their own finances and investments. Wealth is not the same thing as income. Wealth is built by accumulating assets, not by spending them. A fantastic, best-selling book that hammers home these principles is The Millionaire Next Door. If you can employ these principles you will begin to feel empowered and you will take control of your financial future.