It's easy to understand why retirement doesn't loom large on the horizon for 20-somethings. Young workers are more concerned with kick-starting careers, not ending them in the long-distant future.
But it's worth noting that the very fact that you're young gives you a huge edge if you want to be rich in retirement. That's because when you're in your 20s, you can invest relatively little for a short period and wind up with far more money than someone older who saves much more over a longer period.
Consider this scenario: If you begin saving for retirement at 25, putting away $2,000 a year for just 40 years, you'll have around $560,000, assuming earnings grow at 8% annually. Now, let's say you wait until you're 35 to start saving. You put away the same $2,000 a year, but for three decades instead, and earnings grow at 8% a year. When you're 65 you'll wind up with around $245,000 -- less than half the money.
Seems like a no-brainer, right? Save a little now and reap big rewards later.
Unfortunately, many of today's youngest workers pass on the opportunity to save for retirement early, when the beauty of compounding interest can work its magic and maximize savings. A study by human resources consultant Hewitt Associates found that just 31% of Generation Y workers (those born in 1978 or later, now in the thick of their 20s) who are eligible to put money into a 401(k) retirement savings plan do so. That's less than half of the 63% of workers between ages 26 and 41 who do invest in employer-sponsored savings accounts.
Start saving ASAP! There are plenty of reasons you may have yet to save, such as cash flow. If you're struggling to pay off student loans or cover rent, funding a 401(k) may seem difficult, if not downright impossible.
Sign up for that 401(k)! Make the most out of those few dollars you can get hold of by allocating them wisely. Don't squirrel them away under the mattress. You will want them to be invested in a way that will encourage your assets to grow as quickly as possible.
Where to start? If you're eligible to participate in a 401(k) at work, do so. There are plenty of reasons to love these plans but No. 1 by far is that most employers match your contributions in order to encourage your participation. The hitch: Oftentimes, you'll need to save enough to trigger the match.
In a typical plan, employers match up to 3% of your salary, according to the Profit Sharing/401(k) Council of America. When you sign up, the money you save is automatically deposited into the plan before it's taxed, so less of your income will be taxed now. That saves you money, too.
No company retirement fund? Use a Roth instead. If you aren't eligible for a retirement fund at work that gets you matching funds, sign up for the next best thing: a Roth IRA. You'll fund this with money that's already been taxed as part of your normal paycheck. But money in a Roth IRA withdrawn later is tax-free. Save what you can. It will add up. If you are able to sock away $4,000 a year into a Roth for 40 years, and if it earns 8% annually, you'll be a tax-free millionaire at retirement. To make sure you stick to saving, have a portion of your paycheck or payments from your bank account automatically deposited into the Roth each month or every few weeks.
Get educated! Meanwhile, don't be embarrassed to admit that financial talk can seem confusing. After all, financial know-how is not genetically encoded and, unless someone has taken the time to teach you about finance, you'll need to do a little learning. And now that you're starting to make and save money, this is the perfect time to educate yourself. Read books, articles or financial Web sites. The more you know, the easier it will be throughout your career to make solid, informed decisions.
Build a strong defense with an emergency stash. Start amassing an emergency fund so you don't have to rely on credit cards -- and possibly bury yourself in debt -- in the event that your car dies, your roommate comes up short on rent or you suffer some other financial mishap. Ideally, you'll stash up to three months living expenses, but the important goal is to save something. You can help stay on track by having automatic deposits made to your emergency account.
In the meantime, keep an eye on spending. Those splurges can add up fast and will prove to be a huge drain on future savings. What's more, if you pile on debt, you'll wind up wasting a lot of money on interest and fees that could be better spent elsewhere.
Avoid debt! If you're really struggling to stretch the paycheck to set something aside for retirement, this is the time to make some changes. Give your budget a major overhaul. Consider getting a roommate or picking up an extra job for the time being. Big changes now, coupled with consistent saving over time, will reap huge rewards down the road.
Excerpted from Bankrate.com