Saving up for retirement is a crucial aspect of everyone’s financial responsibility. After many years of hard work and sweat, retirement income can provide stability and security for when we are all old, fragile, and wrinkly. However, many people don’t know how or when to start investing their money. Others question if it’s even a possibility to save up because they feel they don’t have anything to give. Nevertheless, there are many alternatives and strategies that can help most people start their journey to generate a substantial pool of money for retirement. Knowing that most of our readers are students who are probably on a tight budget, we will elaborate on the three basic principles of investing for those who still want to try to work towards their retirement goals. These fundamental concepts are (1) starting now, (2) budgeting, and (3) knowing where to invest your money. Along the way we will link the official definitions of specific terms and other articles that expand on the topics at hand in case you feel lost or you wish to research more. In addition, make sure to seek the help of an expert who can provide complete and professional information.
Now, let us begin.
START EARLY
We want you to get this very clear in your head: the further you postpone acting on your finances, the chances of attaining a good retirement income will dwindle progressively. This is why we repeat: start now. Start now. START NOW. The reason we want to begin while we are young is because compounding will become our friend in this process. What is compounding, you ask? Well, it is defined as the following mathematical equation:
A = P (1 + r / n ) ^ nt
A is the end amount; P, beginning amount; r, rate of interest as a decimal; n, the amount of times your beginning amount is compounded every year, which is usually set to 1; and t, time in years. In simple terms, what we get is a set amount that grows by a fixed percentage every year, progressively increasing in value. You would think that to get a larger result you have to set a great deal of cash at the beginning. Yet, the key to this formula is the small “t” at the top of the equation: time. Let us give an example.
You start with $100(P). If you put that money into an account with 15% interest (r), in one year (t) that $100 will become $115(A).
$115 = $100(1+0.15)1
$15 interest earnings of one year
Those extra $15 you earned are considered your interest earnings. If you don’t touch that money and keep it another year it earns an extra 15% on the new total which includes the interest earnings.
$132.25 = $115(1+0.15)1
So, for the second year instead of gaining $15, you make $17.25, turning the total into $132.25. Don’t add any extra money at all for 50 years, and you will have $108,365!!
And you only had to give a hundred bucks out of your pocket. That’s insane! But the percentage used in this example (15%) is exaggerated. We just used that interest rate to show you the power of compounding over a long period of time. Realistically, you can expect your money to grow an average of 8% annually. HOWEVER, even with an 8% return every year, imagine what you can achieve if you now factor in your monthly contributions.
Now, visualize for a moment a girl named Lisa. She is a twenty-year old student, and she has a part-time job making $5,500 a year. She begins right now by depositing $35 a month into her investment account with a conservative return of 8% for 45 years. While she invested $18,900 of her money over the span of almost five decades, she still ended up with a whopping $169,284.
If you start late you are going to need larger monthly contributions to reach this same number. Here is another quick example: Bob has no children, is single, and he starts investing when he is forty years old. He manages to add in $185 every month for 25 years at 8%, so when he retires, he will have $169,245, producing a slightly smaller amount than our previous example.
Yet, Bob gave almost three times the amount of money out of his pocket than Lisa did; he invested $55,500 in total. Compare that to Lisa’s contributions, who only gave $18,900. In the end, she got more bang for her buck because she started young.
Do you see why you need to start early? Compounding needs time, and if you are young, time is on your side. Use that to your advantage. As we saw in Lisa’s example, $35 a month is enough to retire with more than a hundred grand, and this is the result we obtain if she remains with one part-time job for 45 years.
Now, while we are aware that some people may have to take care of family members, pay off debts, purchase prescription medications, manage increasing costs of living, or deal with any other situation that simply does not permit them to save up and invest, the next section (budgeting) should assist those people to at least lower their expenses, giving them some “breath” and tranquility as they avoid living paycheck to paycheck.
BUDGETING
Budgeting allows you to create awareness over your expenses. For this stage, you will create these categories: fixed expenses, food expenses, personal expenses, and varying expenses.
Figure 1.
Fixed. Food. Personal. Varying
-rent. -restaurants. -personal care (shampoo, razors, etc.) -water bill
-car payment. -groceries -movie tickets -electricity bill
-Wi-Fi. -clothes -toll gate payments
-cellphone. -gasoline
Figure 1.1
Fixed. Food. Personal. Varying
09/01/20 08/27/20 08/17/20 08/22/20
-rent: $400 -groceries: $150 -Face wash: $7 -water bill: $70
09/03/02 08/28/20 08/21/20 08/23/20
-car payment: $350 -Olive Garden: $20 -Shirt: $15 -electricity bill: $200
TOTAL: $750 TOTAL: $170 TOTAL: $22 TOTAL: $270
If you pay everything with a credit or debit card, you can look at your withdrawal history and construct a graph on your computer or notebook. If you pay everything in cash, start jotting down EVERYTHING you pay. From your rent to the pack of bubble gums you purchased at the gas station.
So, every time you receive your salary pay or monthly allowance, take out at least $20. You will save this amount for yourself and your investments/savings. Use everything else to pay for your needs and see which categories are sucking up too much. In Figure 1.1, the water and electricity bills could be dropped if you are living alone. You might start turning off the lights when you walk out of a room, using fans during the day instead of utilizing the AC, and taking faster showers. This way you can save up money to put in your investment account or your bank’s savings account, all while helping our planet!
In this self-evaluation you may notice that some of the items you may not regard as expensive are actually taking many, many dollars from you. For example, if you drive every morning to Starbucks and you order a coffee that costs $6.50, in a month you would have spent $195. Also, if you do a lot of exercise and you buy every day a water bottle from a drinking machine, you spend $30 a month on water! Use a reusable bottle instead. Your mission is to find which products and services you are willing to cut out or replace.
Additionally, you should also set goals. For example, you may limit yourself to only spending $150 a month on food by making your coffee, cooking more at home, and sharing a meal with someone on the occasion you do dine at a restaurant. As you probably already noticed, this process involves getting creative and resourceful with what you have. When you find a strategy that works for you, stick to it. Keep in mind, you should create a new budget every single month.
Now that you’ve learned how to budget and save up, now we can get into the juicy stuff.
WHERE AND HOW TO INVEST
We’ve been talking about investing and earning an 8% interest rate, but we know you guys are wondering: “Where exactly do I invest?” For this step, look for either a brokerage account or a retirement account. You can do this by visiting the websites of one of the following companies listed and open an account with them.
-E-Trade
-Vanguard
-TD Ameritrade
-Fidelity
-Ally Invest
-Firstrade
-You Invest
If you are inclined towards the stock market, where one can buy and sell shares from companies, you’ll need a brokerage account, but be aware that whatever earnings you make from this type of account will be taxed once you start withdrawing money from it when you retire. On the flip side, the stock market allows for more aggressive growth. If, however, you want more of a steady and safe snowball that will be tax-free, go for a retirement account, which includes the following types:
-Traditional IRA
-Roth IRA
-SEP IRA
-Simple IRA
-401(k)
Each of these options offer different benefits but they also have unique withdrawal restrictions. As an individual, you can only open either a Traditional IRA or a Roth IRA but do your research on this to find the right account for you. And remember to CONSULT a professional.
When you open your account, you’ll be able to buy stocks, bonds, index funds, mutual funds, hedge funds, ETF’s, and more. This is a whole other topic that can be covered in detail in another post, but if you’re too curious to wait, you can do a quick Google search to delve into this realm of investments.
Phew, you made it to the end! Yayy!!! We hope this information was useful to whoever made it this far. I’m sure that if you apply the steps described in this post, you’ll be able to make significant progress and transform your financial situation. If you want more information regarding the topics we just discussed or other finance subjects, we suggest you look up Andrei Jikh or Graham Stephan on YouTube, or read some books written by finance professionals such as Peter Lynch, Benjamin Graham, and John Bogle. Till next time!