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The best time to start what you ask? Saving and investing for your retirement, of course! That title captures some wise words, I hope you agree – or soon will. It’s certainly never bad to start saving at any time, but playing catch up can be expensive – both in terms of increased dollars needed per unit time to achieve one’s goals, as well as the tradeoffs you have to necessarily make to save more. If you have designs of early retirement as I did, it’s crucial to think about this concept sooner rather than later and to act accordingly. It is effort that will pay off many times over.
Multiplication is our favorite mathematical operation
I’ve mentioned my favorite financial podcast, The Money Guy, before. I was lucky enough to score one of one their insulated can koozies in the past, hence the picture you see here. Most people who would read a financial / early retirement blog understand the power of compound interest. However, the sheer magnitude of it can still surprise even the most informed person when they are presented with the data. The photo here is a great example. It’s represents that considering the projected S&P 500 index growth over time, every dollar invested in an associated index fund by a 20 year-old can be predicted to manifest an $88 value by the age of 65. Now that is powerful multiplication! For more info on this topic including the multipliers for different starting ages, check out “How Powerful Are Your Dollars?” on their Resource page . That resource and this post are great to share with recent high school graduates, those still in college, or those off to their first job. The message is simple: the dollars you save early on are powerful and should be prioritized!
Getting started: Don’t leave stacks of cash on the table!
I’m often asked how to get started, particularly right out of college or in that first job after high school (though knowing what I know now, I would have started contributing to a Roth IRA as soon as I had earned income in high school!). Many people will state they simply aren’t able to save very much – and certainly not to the tune of 15-20% of income that many in the financial advisement community rightfully recommend. The first concept I always raise is to not leave “free money” on the table. By that I mean if you are fortunate enough to be at a company with a 401(k), 503(b), or other retirement vehicle with an employer match – do whatever you reasonably can to contribute up to the match! Otherwise that free money offered up for you will not be in your investment portfolio.
Deferred gratification is your most powerful tool
OK but how can you contribute enough to realize that match? Of course you have other expenses competing for dollars: rent, bills, perhaps student loans. This is where the concept of deferred gratification comes in. It’s worth evaluating your full spectrum of options. Do you “need” a new car or truck right out of school? Of course not. You could drive your existing car longer, buy used, or maybe you don’t actually need a car, because you have other transit options. Maybe it makes more sense to rent vs. buying a home? It’s tempting to fall into the trap of lifestyle creep just because your income “allows” it. Take it from me – it’s better to drive that clunker a little longer, because the investment dollars in those early days are worth so much in the long term. I drove my old Dodge Dart, followed by my base model Saturn (read: no power steering) for years before I finally bought a new car. And I didn’t buy a “nice” car until I was in my 40s. Why? I wanted to save more for retirement and I didn’t “need” a nice car. These are choices, of course! But delaying those bigger ticket items longer means more ability to save when the impact is the greatest. On this topic, if you haven’t read “The Millionaire Next Door” by Thomas Stanley, I’d recommend it.
The earlier you get comfortable with the concept of deferred gratification, the better. I recommend you make it your practice to increase your investment contributions every time your income increases. Some retirement plans have an option to do this automatically when you get a raise, which is great! Otherwise, the inevitable lifestyle creep can rear its ugly head. That means spending more just because you’re able to do so, which is completely in conflict with any goals of early retirement. It’s not a race to “keep up with the Joneses” after all, right?
So life is just toil and NO fun, is that the key to success?
Of course not! We all get to decide every day how we allocate the dollars we have coming in. I merely suggest that I believe it’s important to really think about your priorities and ensure that your savings match those intentions. For my family, we decided long ago that experiences were valued much higher than “stuff”. So we were elected to put our money towards a nice vacation once a year, along with less costly trips (National Parks visits, for example) in between. We have always felt that the return on our “invested” dollars for vacations was huge! This is something we absolutely will continue to do in retirement, and for which we have budgeted explicitly. You need to decide what is most important to you. As far as I know we get one shot at living so of course you need to enjoy it in the ways that make sense to you.
Bringing it home
Prioritizing saving was definitely central to my own path towards early retirement. I also didn’t stop with my 401(k). I started contributing after-tax dollars to a brokerage account as soon as I could, along with increasing my 401(k) as my income grew. I did this because for me and my family, my retiring early was a priority. If it is for you as well, I encourage you to do a few things: evaluate your budget, and see where there might be opportunities to increase your savings rate. Look into automatically increasing your investment rate as your salary increases if this is an option. Consider whether that big ticket item you’re considering truly is a priority now, or if it can be deferred for a later date. If this is all a big ball of confusion, consider talking with a financial advisor – one with a fiduciary responsibility to you. You don’t have to go it alone.
Good luck! If early retirement is your goal, take a look at your own situation and what you can do to achieve financial independence (FI) sooner!