It was Benjamin Franklin who said, “A penny saved is a penny earned.” As important and accurate as he is, I think I can improve on that bit of Founding Father wisdom by adding, “And a penny saved today is worth a lot more pennies than a penny saved tomorrow.”
You know you should be saving for retirement right now, but here’s yet another reminder of the importance of getting time on your side. If you put $1 away at age 20, that dollar would be worth $21 by age 65, assuming an average 7 percent return over the years. If you wait until 30 to invest that same $1, it will be worth $10.68. Start at 40 and you will have $5.43. Wait until you turn 50 to invest that same $1 and you’ll get a measly $2.76.
So a dollar invested at age 20 is nearly twice as productive as a dollar invested at 30 and 7.5 times as powerful as a buck that gets put to work at age 50!
If you haven’t started already, start saving TODAY. Every day that you wait is costing you serious money. But it’s not enough to just save; you need to have a plan to maximize your return. My Hierarchy of Investment Savings will do just that. It clearly outlines where to put your money and in what order.
First, start by creating emergency cash savings. This should include enough money to pay for anywhere from three to six months of your fixed expenses. Keep these funds in a money market account or other very liquid investment in case you need it immediately. Use this money only for true emergencies, such as job loss or catastrophic medical costs.
Secondly, if you have a known large expense coming up in the next 12 to 18 months, like a down payment on a house or need a new roof, set this aside in cash as well. It doesn’t make sense to have your emergency fund wiped out due to a planned financial event, even if its a year or year and a half away.
Once your emergency fund is in place, you make the maximum contribution to your employer’s matching 401K program. While not all companies offer this, a typical matching program is 50 percent of the first 6 percent. Find out if your company offers this type of program and what percentage they offer so you can take full advantage of this great benefit.
Next, start funding a Roth IRA. Contributions are made with after tax dollars and can be withdrawn at any time without penalty. Once you reach 59 and a half, all withdrawals are tax-free, and there is no mandatory distribution age.
Once you have funded your Roth IRA, go back and try to max out your 401k if possible. In 2013, the max contribution was set at $17,500.
If you have done all of the above and still have money to save, put those funds in a brokerage account.
Got a question about this system or any other aspect of your personal financial situation? Let’s talk.
My email, email@example.com and twitter @WesMossWSB