In last week’s post I covered the consequences of early withdrawal from retirement funds. This week, we’ll look at the importance of saving for retirement, to begin with, and what strategies can make you an effective saver and investor over the long term.
Early and Often
You don’t have to save a lot of money to start investing. The important thing is that you start. Perhaps you begin with $50 per paycheck. That will add up to $1,300 over the course of the year assuming you are paid bi-monthly. If you’re offered an employer match for a retirement account you want to be sure to contribute enough to receive the full match. Saving some money now has a much greater effect than saving more later, which brings us to…
I’ve emphasized the importance of compound interest previously in this blog: Revisiting the Rule of 72: The Power of Compound Interest Over Time. This is Investopedia’s definition of compound interest: “Interest calculated on the initial principal and also on the accumulated interest of previous periods of a deposit or loan. Compound interest can be thought of as “interest on interest,” and will make a deposit or loan grow at a faster rate than simple interest, which is interest calculated only on the principal amount.” As you can see, reinvesting the proceeds is a necessary part of this process. This article, Why Investors Need to Understand the Shape of the Compound Growth Curve provides a helpful graph to show the power of reinvesting proceeds.
Low Investment Fees
High investment management feeds can erode the amount that is compounding over time. In a publication I received from Vanguard they gave the following hypothetical example, which I will paraphrase. Ten thousand dollars is invested in two funds. Lets call them “Expensive Fund” (charges 1.30%) and “Inexpensive Fund” (charges .30%). After 20 years, Expensive Fund has a balance of $43,399 and Inexpensive Fund has $53,471. This 1% charge, which may seem innocuous, is anything but. It would cost you over $10,000!
Start saving small yet consistent amounts toward retirement, invest those funds so that they have the potential to grow over time. Also, be aware of the fees you are charged for the funds you select in order to maximize your ability to SaveUp!
This post was written by SaveUp’s personal finance contributing writer, Catherine Hawley, CFP®.