Thinking about putting money away for something you won't use for another 40 years may seem unreasonable as you establish yourself in your career. When you need to pay pressing bills like credit cards, student loans, car payments and rent, it can be difficult to choose to set aside part of your hard-earned paycheck for your long-term retirement goals.
It might seem easier to just wait until you are more established and the dollars are rolling in from your well-oiled career. Plus, deciding which investments to use takes time and effort that many people aren't willing to give.
Well, there are many compelling reasons to invest as much as possible as soon as possible in your retirement plan. From your perspective as a 20-something or 30-something, the largest incentive that should inspire you to stop procrastinating and start up your retirement plan contributions is compounding.
Are you asleep yet? I think I can make it more interesting than your high school math teacher because compounding might just be the reason that you have enough money for retirement.
How compounding works: a simple example
When you have an investment that grows in value, the added value is called earnings. Compounding is the growth of your earnings. Imagine that you invest $1,000 each year. After one year, your investment has grown 7 percent to $1,070. Then the investment earns another 7 percent during the second year. Your value at the end of the second year is $2,214.90, figured with this equation: ($1,070 $1,000) x 1.07.
Now that's just two years of growth. Take the same equation over 40 years, and you're looking at a substantial and powerful tool in your quest for retirement bliss. Use a compounding calculator to see what time does for your savings.
One reason you give for not saving now is that you'll have more money to invest when you're older. You're probably