Recently, I was asked what advice I would give my 20 year-old self. Philosophically, I thought things such as you will make mistakes and everything will be alright, or you won’t have all the answers. Practically, I thought. “Start saving NOW.”
For some people, saving money seems to come easily, and for others not so easily. I fall somewhere in the middle. It takes discipline. My savings advice is to first set goals. The first goal takes consideration. “What would I do in a financial emergency?” If the answer is hard, you should start an emergency savings / reserve. Traditional guidance would tell you the amount in an emergency fund should be from three to six months of net take home pay. If your monthly take home pay is $1,400 ($2,000 gross), your goal would be to save $4,200. This fund would serve as your reserve for unexpected expenses such as a car repair bill or missed work due to an accident or illness.
Make it easy. Ask if your employer will carve out a portion of your check and deposit in your bank account for you for emergencies. Once you have the emergency fund established, then move on to saving for the more inspiring items such as a down payment on a house, a vacation, or future education.
The second goal is to save for retirement NOW. If your employer offers a 40lk plan, begin the first date you can. I promise, your future self will thank you! With a 401k, you choose how much and contribute a little of your salary each payday. If your employer offers to match this amount (and most do), start with the highest amount the employer will match. If your employer will contribute 4% to your future, you should too.
Doing the math, if you earn $2,000 monthly, 4% would be $80. You and your employer would each contribute $80, for a total of $160 or 8% of your salary. Assuming 45 years until retirement, average pay increases and investment returns, your future self would enjoy a savings of $858,000! You would have contributed $92,000 and your employer $92,000. Better yet, neither contributions nor earnings would be subject to tax. Only when you withdraw the money will taxes be withheld.
What happens if you wait 10 years to start this? You would only save $392,000 – a difference of $466,000! And if you waited 20 years, you would only save $166,000. This is why your future self will thank you for starting when you are 20 and not 30 or 40!
If your employer doesn’t offer a 401k plan, you can utilize an individual retirement account (IRA) to save for retirement. A $40 per week contribution with the same return and time period would grow to $636,000!
Saving is very important for your current and future self. At Citizens Bank, we are passionate about helping you chart a path to financial success, savings and retirement options included. We want to be your financial partner now and in the years to come.
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G. Gene Crawford II is President of the Trust Division at Citizens Bank in Batesville. He can be reached at 870-698-6371, or by email, email@example.com.