You’ve just started your career. Finally, you have a little money saved up. So how can you make your savings account grow? How can you make your money work for you?
Even if you start small, the financial decisions you make when you’re starting out can make a huge difference for your future. We’ve put together a list of some simple steps you can take to build your wealth.
Begin saving for your retirement. Whether you are just starting your career, been at it for a few years now or have rounded the corner at 40 and are thinking about the years ahead, it’s time to start saving for your retirement. Because the choices you make today – yep, even if you are in your twenties – can have a big impact on the latter half of your life.
Find out about the benefits your employer offers. Just by asking a few questions at work, you can find out how to make the most out of your savings. For instance, some employers match 401(k) plans. That means that for every dollar you put into your 401(k), your employer will typically put in at least another dollar – some put in more.
Learning about your workplace benefits when you’re just starting out can help you make important decisions about how to save for retirement most effectively in the long run.
Start an automatic deposit plan. You won’t miss what you don’t see. When you set up an automatic deposit plan – for your retirement and savings – early on in your career, your savings will add up quickly and painlessly, and you’ll be able to invest that money later on. Talk to your employer for your retirement savings and your bank for personal savings to find out how you can set up an automatic deposit plan today.
Start an investment portfolio. You may think you need to be wealthy to start investing, but that’s not the case. For example, even if you invest only $1,000 at 5% interest, compounded annually, your investment will continue to grow and in thirty years, that $1,000 could become $4,321.94 – and that’s based on a conservative interest rate.
Before you begin investing, take the time to educate yourself about the stock market and analyze the quality and growth potential of stocks. Investing requires research and calculated risk-taking, but if you gain a good understanding of investment options and start early, you could expand your portfolio significantly.
Think about spending and saving in a new way. For many people, the hardest part about saving is being mindful about expenditures. When is it okay to splurge? When is it not? Should you use credit?
If you’re making an hourly wage, it might help to think about your larger purchases in terms of how many hours of work it took to pay for them. A $500 handbag, for instance, might be worth an entire week of work. After you do the math, ask yourself if it’s still worth it to you to spend that much. If it is, go for it! If not, take a step back and find a good alternative.
Start a Roth 401(k).* Unlike a traditional 401(k), the money that goes into a Roth 401(k) is taxable in the year it is earned, while the money that goes into a traditional 401(k) is taxable in the year it is withdrawn.
If you are just starting out, chances are, you are in a lower tax bracket now and will likely be in a higher tax bracket at retirement, so a Roth 401(k) could help you save more money on taxes. For example, even if you contribute only $1,000 per year from the time you’re 25, you could have more than $200,000 by the time you’re 65.
*The tax information provided is general in nature, is for informational purposes only, and should not be construed as legal or tax advice. Financial Engines does not provide legal or tax advice. Financial Engines cannot guarantee that such information is accurate, complete, or timely. Laws of a particular state or laws which may be applicable to a particular situation may have an impact on the applicability, accuracy, or completeness of such information. Federal and state laws and regulations are complex and are subject to change. Changes in such laws and regulations may have a material impact on pre- and/or after-tax investment results. Financial Engines makes no warranties with regard to such information or results obtained by its use. Financial Engines disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Always consult an attorney or tax professional regarding your specific legal or tax situation. Example shown for illustrative purposes only.
© 2014 Financial Engines, Inc.