College students and recent graduates are usually only concerned about what’s immediately in front of them – the job interview on Friday or the mid-term just around the corner – while others might be saving to travel before settling into their careers.
In both cases retirement seems like a lifetime away, and it is. But according to a recent survey, four in ten young adults were “not too” or “not at all” confident they’d be able to secure enough income and assets by the time they retire.
So why do 60 percent of Millennials disregard saving for the future? The main reason is because setting up a retirement plan is a boring investment when compared to all of the other things they could do with their money. We do live in the age of instant gratification after all.
Remember that word, “investment,” as it reflects the mentality with which you should approach the subject. And with that in mind, here are eight ways you can plan for the future while still maintaining a healthy work-play balance.
Here are the 8 Ways to Jumpstart Your Retirement Plan in Your 20s:
Curb Your Spending Habits
This isn’t to suggest that you need to save every penny like it’s going out of style – just that you make smart judgement calls when it comes to how you spend your weekly paycheck.
There are many ways you can save money by trimming your budget, by cutting back on those little luxuries and making necessary changes to ensure that you’re spending less than you earn. I used to think that a weekly gel manicure was something I absolutely needed; especially since I thought it was such a bargain here in the States (the prices that the nail salons charge in Korea are ridiculous). Now I’m committed to setting aside a portion of my income on a scheduled basis.
Come to Terms with Compound Interest
If you’ve set up a savings account with any financial institution, you’re likely relying upon compound interest to make your money work harder for you; but there is a range of specialist retirement accounts to help the busy 20-something.
Assuming you’re able to place $416 a month into a tax-deferred retirement account that earns 8 percent per year on average, you’ll stand to earn $1.3 million over 40 years. For comparison, if you started saving in your thirties and did so for 30 years, you’ll have raised a mere $474,000 under the same set of circumstances.
Set Up and Contribute to Your 401(k)
One of the benefits of having established a 401(k) in your 20s, is that part of your weekly paycheck will be automatically withheld, preventing you from spending it. This makes it a very effective investment option, provided your contribution percentages can be automatically increased.
According to a Millennial money study by Fidelity, saving just 1 percent more in a 401(k) or $50 more in an IRA each month doesn’t cost much and can make a big difference. At age 25, just 1 percent increase could raise your total retirement income by $330 each month – representing a significant increase in overall funds.
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Pay Off Your Student Loans First
Without question, one of the biggest financial challenges preventing students and recent graduates from saving or setting money aside are their student loans.
Paying these off is a daunting task if you do it alone but your 20s are ideal years to spend reducing your debt considering you’ll likely be at the stage in life where you’re earning the most you’ve ever been.
Student loans won’t disappear overnight so be prepared to make additional voluntary repayments if at all possible. And while there are many other ways to pay loans back faster, just make sure you don’t lose sight of the bigger picture.
Avoid Falling Victim to Credit Card Debt
It’s tempting to apply for a credit card and then use it to pay off your debts but this often creates a vicious cycle that can be hard to escape.
According to recent research conducted by Demos, young people aged 18 to 24 have credit card balances of $2,982, well below the average. Those aged 25 to 34 were able to reduce their plastic debts by around half, but still owed more than $5,000 on average.
As a general rule, keep your debt below 30 percent of your credit line at all times to ensure you don’t strain your finances and create the situation where your debts outpace your ability to pay them off.
Set and Meet Smaller Financial Goals
Reaching your financial milestones is a good feeling, but so is meeting those smaller savings targets, which has everything to do with fiscal responsibility and discipline.
If you find yourself running into trouble with staying on track, try implementing a five-step plan to make things more straightforward. Remember that financial discipline is something you can learn and it becomes much easier the more you practice.
Diversify Your Portfolio Early
At this stage in your life, you may be wondering what else you could put money towards to secure your retirement. Consider allocating a few dollars for the purpose of investing in stocks or bonds.
Even if you’re not entirely clear about when the best times to buy and sell are, members of Gen Y are particularly well-placed to take on risk. By investing in a variety of stocks to boost and diversify your portfolio, you’ll maximize the funds available when you reach retirement age.
Consider Working with a Financial Planner
One fear that many Millennials have is that they won’t be able to afford an experienced financial planner. But it’s important to realize that they can often be worth their weight in gold. They can help you identify any specific problem areas, while allowing you to develop a savings plan moving forward.
The last thing that I’ll mention is that finding financial stability early is one of the keys to jumpstart your retirement plan. Oftentimes, all it takes is a little to earn a lot.