Carol Chan is a writer for BUILT BY GIRLS, which prepares the next generation of female and non-binary leaders to step into their power and break into their careers. WAVE is the backbone of BUILT BY GIRLS: it’s a 1:1 matching program that connects high school and college students with top tech professionals across the country. For more information and to sign up check out builtbygirls.com.
The fact that you’re here reading this means that you’re probably ahead of many when it comes to saving for retirement. There’s also no “right” plan that is one-size-fits-all since everyone has different circumstances and money goals.
Having said that, my biggest advice is to invest as much as you can afford to for retirement as early as possible. Why? Because of compounding interest. Compounding interest is interest earned on money that was previously earned as interest. In other words, interest on interest. It might be difficult to understand at first, but in simple terms it means making your money work for you.
Here’s a real example: Let’s say you land your first job at 25 and you start investing $1,000 a month into a retirement plan, with an average annual interest rate of 5%. By the time you retire at 65, your funds would amount to $1.45 million. However, if you waited until you’re 35 to start contributing the exact same amount — your retirement fund would only be just under $800,000. Sure, that’s still a good chunk of money, but imagine if you started earlier? (I used this handy calculator to figure out how my investment can grow.)
It’s not about how much you save every month, so don’t think you have to put aside a hefty sum. It’s more important the amount of time you let your savings compound on each other — or accrue.
So now that we know the power of saving early, here’s a few tips to help you tackle your retirement plan.
Figure out how much you can comfortably save
Many financial experts recommend the 50/30/20 rule where 50% of your monthly income is spent on necessary expenses such as rent, food, utilities, and other bills. Then 30% of your income goes toward the fun stuff. And finally 20% is put towards long-term financial goals like a savings account, retirement savings, or paying off debt.
This ratio is just a starting point, though. If you’d like to have a more tailored approach, you can do some simple math to figure out your own savings rate. Keep track of your monthly income and expenses. Whatever amount you have left over is your potential monthly savings. From that pool, you’d want to set aside three to six months of emergency funds in an account you can easily access, and then allocate any leftover amount towards those long-term saving goals.
Make regular contributions to 401k and IRA accounts
If you have a job that offers a 401k retirement plan and employer-matching, you should try to contribute as much as you can. The minimum is to try to get your employer’s match. If you’re starting out at your first job and if your living expenses allow you to, try to add even more! If you max out your 401k, consider contributing to an IRA (Individual Retirement Account). Since these are not tied to your workplace plan, you have more control over your investment decisions.
Diversify your investments and consider your risk
The saying “don’t put all your eggs into one basket” definitely applies to your retirement plan. A simple way to diversify is to consider index funds and ETFs over individual stocks. These are a collection of stocks, thereby getting your hands into a broad range of investments with minimal costs. You can browse Cashay to find other articles that provide a deep dive into saving and investing.
Just remember that however you decide to approach retirement, you just have to start. The worst thing is to do nothing at all. Start small and be consistent. Your future self will thank you!
Read more information and tips in our Retirement planning section