How much money are you putting into retirement savings accounts? If your answer is "none," you're making a big mistake. You cannot live on Social Security alone in your later years, and most people don't have pensions, so you have only yourself to rely on when it comes to saving for a secure future.
Finding spare cash to save for when you're a senior can be really difficult, especially if you have a lot of pressing financial obligations today. But no matter what else you're doing with your money now, you should open up a retirement account today and start putting at least some money aside.
There are lots of reasons not to procrastinate, but here are three big ones that should persuade you to start making 401(k) or IRA contributions as soon as you finish this article.
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1. Compound interest can start working for you
Most of us work hard for our money. But when you invest for retirement, you can actually make your money work hard for you -- thanks to the magic of compound interest.
When you invest money for retirement, the cash you've put into stocks or other investments can earn a return-on-investment. If you've invested in a diversified mix of stocks, you can reasonably expect an average return of around 7% to 8% annually, based on historical averages. As your money earns money, that additional cash becomes part of your investment account and can be reinvested in income-producing assets as well.
Here's a simple example. You invest $1,000 and earn 8% annually, which compounds monthly. This means the money you've earned during the first month is added to your initial $1,000, and the money you earn in each subsequent month is also added onto your new balance.
At the end of the year, you won't have just $1,080 -- you'll have $1,083. That happens because your balance grows by a little bit every month, so the next month you earn a return-on-investment on a slightly higher balance. At the end of the first month, for example, you'd have already earned $6.67 in interest. So in month two, you'd be earning interest not on $1,000 but on $1,006.67. After two months, your balance would be up to $1,013.38 and you'd now earn interest on that new balance.
Over time, compound interest helps even small amounts of money grow a lot. Compound interest can turn that $1,000 into about $10,935 over 30 years, assuming an 8% return compounded monthly. Your initial deposit just keeps growing and earning more over time. And the sooner you start investing, the sooner your money starts working hard like this.