Save early, save often for a healthy retirement

It’s often called the miracle of compound interest: interest that is paid each year increases the amount on which interest is calculated the next year, a phenomenon that can lead to huge growth over time.

The key word here is time, and that means that the earlier you start saving, the better. For young people who are struggling to pay off student loans or buy a home, putting money aside for the future seems not only impossible, but unnecessary: after all, you’ve got years and years to save, and it will be easier down the road when you’re making more money.Saving

But that kind of thinking can cost you. Imagine a 20-year-old who saves $50 a month every month, either in a 401(k) or a money market fund earning 6% interest. At 65, she will have $138,489. But her brother, who likes to drive a new car every year, doesn’t start saving until he’s 35. His $50 monthly savings will add up to only $50,477 when he reaches 65. Her actual contributions total $9000 more than his, but she ends up with over $88,000 more. Think she’ll let him borrow her sports car once in a while?

OK, now we know why we should start saving—the next question is how. First rule: if your employer offers a 401(k), enroll now. It’s much easier to save when the money is automatically deducted from your paycheck. And if you are one of the lucky ones whose plans include an employer match, make the effort to sign up for the maximum deduction—why pass up free money?

We all know we should kick the latte habit and make coffee at home, brown-bag it instead of spending big bucks on lunch, and walk or take the bus instead of hopping into a cab.  But here are some more saving ideas you may not have thought of:

  • If you usually get a big tax return—and spend it as soon as you get it—consider adjusting your withholding to increase your take-home pay. Then have the difference automatically transferred to savings.
  • Change the deductible on your car insurance. It may seem risky, but if you’re carrying a policy with a deductible of less than $1000, the odds are you’re spending too much. Reduce your premium for instant savings.
  • Look into a Flexible Spending Account. If your employer offers a high-deductible insurance plan, you can pay for medical costs with pretax dollars, and save more than you might think. Talk to your HR department to learn more.

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