Why the Time Is Now
As you probably know, the average college graduate leaves school with a bachelor’s degree in hand, tens of thousands of dollars of student loan debt, and little else. And, for those who did decide to apply to be a fraternity/sorority member, possibly another twenty thousand or so in credit card debt. Ouch.
But there is good news, and it’s time to put the power of compounding interest to work in your favor! Yeah, yeah, we know it’s a “buzz” word, but there’s a reason it keeps coming up. It’s just that darn effective.
Every day we are bombarded with news about the debt crisis and how it’s ruining the country. And while we agree it’s a serious problem, here’s the thing about debt: it’s not necessarily bad. If used correctly, debt is an incredibly effective tool that can help you build wealth.
The key to using debt effectively is to pay off your debs as fast as possible, and the best time to do so is when you are young and have plenty of earned income.
Create a Long-Term Plan
Many people believe that thinking about retirement is boring, because they don’t understand the benefits of planning. Some people believe you can never plan for something like retirement; it just happens. Fortunately, this is not necessarily true. You can plan for retirement by working towards your dream retirement. Start by thinking about something you would like to do everyday when you retire. Then consider how you can begin making money doing something that you want to do. To help you think about your dream retirement, think about what activities you enjoy and what you’re good at, and then start thinking about how you can incorporate these into a career goal.
Now that you have considered what you would like to do when you retire, you need to determine how much money you will need to retire. To do this, start by estimating expenses. Look at how much money you currently make while working. Then look at all of your monthly expenses (rent, utilities, insurance, etc.). Next, discuss how you would like to spend the money you’ve saved for retirement with your spouse (if applicable). Remember, even though you will need significantly less money during retirement, estimates may be on the optimistic side, so start conservatively.
Diversify Your Investments
One aspect of retirement planning is investing, and you should try to start saving as early as you can. Investing may seem complicated, but it’s actually very straightforward. You’re going to need to invest in different types of investments.
One of the most important things to do is to diversify your investments.
What is diversification?
That means you put your money into different types of assets, such as stocks, bonds, real estate, and gold. Diversification is crucial because it “reduces sensitivity to overall portfolio movements, allows for exposure to different real interest rates and inflation, and helps reduce the degree of uncertainty.”
Diversifying allows your money to grow faster and more safely, which makes it less susceptible to drastic losses or downturns in various markets.
You should use an investment vehicle that will help you diversify your portfolio, such as an investment company that deals with various types of investments, or an individualized retirement account.
For example, if you have your money in corporate bonds, you might want to put some in Treasury bonds or money markets.
Automate Your Savings
Once you start saving for your retirement, don’t stop. The easiest way to do this is to have all of your savings – employer, personal, and tax-advantage accounts – deducted directly from your paycheck and put into a 401(k) or a similar workplace retirement account. Furthermore, as soon as you’re eligible to do so, convert your tax-advantage 401(k) to a Roth 401(k) or convert your taxable investment account to a Roth IRA. In the short term, these moves will cost you money, but they will allow you to grow your savings tax-free, and they will allow you to retire tax-free should you choose to actively withdraw funds from your accounts instead of letting your savings generate income over time.