We all have a financial plan. Right? If you’re reading this and believe that a financial plan is something for grown-ups, then I have some timely advice for you. You’re wrong. In fact, it’s never too early to plan for your financial future, and the reality is that the sooner you start (and children should do this), the better off you’ll be. And if you already have a plan, then consider these tips a refresher.
We work to earn a living (and hopefully get some satisfaction out of the deal, too). Money is the necessary evil that makes the world go round. But the fact remains that far too many of us are not adequately planning for the time when we are no longer able (or simply don’t want) to work. Retirement comes a lot faster than you might think...especially if you’re just setting out into the working world. So do yourself a favour and follow these simple tips. Your future-self will thank you. Good financial habits don’t have to be painful, and the amount you make doesn’t affect it all that much. It’s not how much you make, but how you make it work for you.
1. Go to University. Over the course of a 40-year career, you’ll make more money than your college and high school grad colleagues. A recent report out of Ontario puts the actual figure at roughly $1,000,000 more.
2. Pay Yourself FIRST. Set up an automatic withdrawal of 20% of your paycheck to a savings/retirement account. Make it automatic, so you never have to think about it, and you won’t have the option of not doing it. And don’t forget to funnel it someplace it will be untouchable, like a locked account that comes with stiff penalties if you choose to dip into it. Elizabeth Warren, in her book All Your Worth: The Ultimate Lifetime Money Plan, suggests what she calls the 50/30/20 rule. The idea is 50% of your take-home pay, however much that is, goes to needs, 30% to wants, 20% to savings/retirement. This formula will also help you live within your means.
3. Place a time value on all of your purchases. To do this, calculate your hourly wage, regardless of whether you are paid by the hour (Take-home pay per week or month divided by the number of hours worked). Once you have that figure, use it to convert any purchase to a number of hours. Want to get the new iPad? Convert it to hours, and then see how you feel. At roughly $700 for a 32GB iPad Air, that might work out to SEVENTY hours if you’re a student earning $10/hour. Still worth it? Perhaps...but it will definitely make you think about it a bit more.
4. Examine your available retirement and saving options. 401(k), Registered Retirement Savings Plan (RRSP). Tax-free savings account. There are many ways to set money aside for retirement. As a savvy financial thinker, you should examine all of them to see what works best for you and your goals. They are not all created equal, and some actually carry fees that can add up over a few decades. Do your homework. Beyond that, check to see if your employer has a retirement contribution matching program, and if so, make sure you’re participating.
5. Compound Interest (I saved the best for last). The best, simplest, and easiest financial advice you will ever receive - the sooner you start, the more you earn, thanks to compound interest. You’ve probably heard this before (okay...probably dozens of times before), but it's absolutely true and of the utmost importance. Start saving as young and as early as you can. Make it work. Find a way.
As a simple example, imagine that you start socking away $200/month starting at age 25 (a reasonable amount and age). Let’s give you a realistic 7% return annually on that money. In forty years, you’ll have saved almost $525,000. A healthy sum, and one that was reached with a relatively small monthly contribution. The trick is starting early and utilizing compound interest.
Now, pretend that you instead wait until age 35 before you start putting aside money for your golden years. It’s only ten years later, how much of a difference could it possibly make, right?
Try nearly half. That’s right. Setting aside the same $200/month, the same 7% annual return, but starting at 35 until you retire at 65, and you forfeit almost half that amount. You'll have saved $244,000 to be precise. Those ten extra years provided almost $300,000 more in your nest egg.
Now, imagine if you started putting money away at age 20, or 15, or even ten years old. Regardless of the actual amount (your ten-year old self probably doesn’t have $200/month), it’s the number of years that the money accumulates and rolls over that makes the biggest impact. Start early.
Finances need not be confusing. Or scary. But nor should you employ an ostrich-in-the-sand approach, either. You need to take direct and active steps to secure your financial future, and the cardinal rule seems to be "start yesterday". And if that isn’t an option, then start today. Go ahead...I’ll wait.
Photo by 401(K) 2013
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