“I’ve heard my parents use the phrase, ‘Make your money work for you.’ So do I need to find my cash a part-time job?”
Your retirement accounts will help your cash get some overtime hours. The $50 you set aside each paycheck now will compound and turn into a sizable nest egg by the time you reach 65 (or whatever age our generation will eventually retire). A 25-year old who saves $100 a month is still better off at 65 than someone who starts their retirement nest egg at 45 and saves $300 a month. Drop the mic.
Compounding, on the simplest level, happens in your savings account: if you have $10,000 and your annual interest rate is 0.5% (yes, we know this might be higher than what you’re getting at your local bank) – that’s an extra $50 in your account at the end of the year. When you calculate interest on that $10,050 next year, you’re not gaining a flat $50 bump in your savings, but $50.25 to account for your earnings’ earnings.
But since you’re smart, you wouldn’t hold $10,000 in any old savings account unless you needed the money for a major upcoming purchase. Let’s put that $10,000 into a tax-sheltered retirement account, where you’ll invest it in a mutual fund. Assuming an 8% yearly return, that’s $800 your retirement savings “earned.” An 8% return next year on your brand spankin’ new $10,800 becomes $11,664. And that’s without contributing a dime. Compounding is your money getting a sweet promotion every year.
Not 100% sold yet? Allow us to wax poetic on the other beneficial aspect of your retirement accounts: they’re tax-advantaged. That impressive compounding we outlined above grows tax-free year after year – no income taxes, no capital gains – and depending on the retirement account you have, you may not have to pay taxes at all on your withdrawals.
You don’t need a calculator to see that the sooner you start saving, the more money you’ll have when you retire. Start funding your future bingo nights and a cozy retirement home in Florida now.