Since it’s Financial Planning month, we’re going to focus this blog on the power of saving. Saving early is a financial superpower that can change your whole future. A lot of folks think they can just “catch up” later, but the truth is, the magic of compounding interest makes every dollar you save in your 20s worth way more than a dollar you save in your 30s.
Think about two friends: Sandra, who starts putting away $200 a month at age 25, and Mark, who starts with $300 a month at age 35. Both get a decent 7% return on their investments. By the time they hit 65, despite Mark putting in more money overall, Sandra will have about $525,000 while Mark will have about $365,000. That’s a difference of almost $160,000! See, that small head start gives her money an extra decade to grow and compound, turning a little bit of effort into a huge nest egg.
So, how can you grab this power and get your savings in high gear? Here are a few easy-to-follow tips:
- Set It and Forget It
The easiest way to save more is to just make it happen automatically. Set up a transfer from your checking account to your savings or investment accounts every time you get paid. Even a little bit adds up to a ton over time. Many companies even let you automatically increase your 401(k) contributions a little bit each year, so your savings grow right along with your paycheck without you even having to think about it.
- Pick the Right Accounts
Not all savings accounts are created equal. For retirement, you want to use accounts with special tax perks:
- Roth 401(k) and Roth IRA: You put money in after taxes, which means when you take it out in retirement, it’s all tax-free. This is a game-changer for building serious wealth. Even with current tax rates, it’s uncertain how long they will stay given the growing deficit.
- Health Savings Accounts (HSAs): These are a real triple threat. You put in money tax-free, it grows tax-free, and you can take it out tax-free for medical bills. See our blog about not withdrawing this money for medical expenses. If you have a high-deductible health plan, you’ve got to use one of these for both healthcare and retirement.
- Brokerage Accounts: If you’ve maxed out your other options, a standard brokerage account lets you invest in almost anything. It’s not tax-advantaged in the same way, but it gives you a lot of freedom and flexibility because you can withdraw the money at any point in time.
- Unlock Hidden Funds
Did you know you might have savings hiding in plain sight? For example, you can now roll money from a 529 college savings plan into a Roth IRA. If your kid got a scholarship or didn’t use all the money, you can roll up to $35,000 into a Roth IRA for them. It’s a great way to kickstart their retirement savings.
- Spend Less, Save More
Got a tax refund, a bonus, or even cash from selling old stuff online? Treat that “found money” like a chance to turbo-charge your savings goals. Instead of blowing it on something you don’t need, throw a good chunk of it into your investment accounts.
Starting early, automating your savings, and using the right accounts can build a seriously solid financial future. Don’t underestimate how much consistently putting money aside can do for you. Your future self will be thanking you big time.
About Michael
Michael is a CFP® with over 15 years of experience working with families accumulating and preserving wealth. Do you need help planning for your financial future? Contact us today to set up a meeting to talk about your goals.