Last week, I wrote a blog post about the dangers of debt. In it, I shared a quote from J. Reuben Clark that shows just how vicious interest can be when we’re stuck working for it. Here it is again, in case you haven’t read it already:
Interest never sleeps nor sickens nor dies; it never goes to the hospital; it works on Sundays and holidays; it never takes a vacation; it never visits nor travels; it takes no pleasure; it is never laid off work nor discharged from employment; it never works on reduced hours; it never has short crops nor droughts; it never pays taxes; it buys no food; it wears no clothes; it is unhoused and without home and so has no repairs, no replacements, no shingling, plumbing, painting, or whitewashing; it has neither wife, children, father, mother, nor kinfolk to watch over and care for; it has no expense of living; it has neither weddings nor births nor deaths; it has no love, no sympathy; it is as hard and soulless as a granite cliff. Once in debt, interest is your companion every minute of the day and night; you cannot shun it or slip away from it; you cannot dismiss it; it yields neither to entreaties, demands, or orders; and whenever you get in its way or cross its course or fail to meet its demands, it crushes you.1
Here’s the dealio. Interest is terrible if you’re the one paying it. By nature, it extends the term of your debt, and it keeps you in a constant state of bondage. But how awesome would it be to have something that tenacious working for you? How do we get that to happen? Invest!
Retirement is no. 1
There are a number of things you can invest in, and they’re all pretty exciting. But your retirement should always be one of your top two savings goals — the other being an emergency fund.
A staggering number of Americans haven’t prepared for retirement at all. The Federal Reserve reported the following earlier this year:
Thirty-one percent of non-retired respondents report that they have no retirement savings or pension at all, including 27 percent of non-retired respondents age 60 or older.2
I imagine that part of the reason for these numbers could be the crippling debt we get ourselves in, justified or not. It could also have to do with our sky-high medical costs. Or the fact that the cost of living has outpaced income growth in America over the last 12 years.3
Whatever your reason for not saving toward retirement, it needs to become a priority. I’ve met too many people in their 50s and 60s with no clear path to leaving the workforce for good and it’s heart-breaking for them realize they may never retire.
Start saving for retirement yesterday
The sooner you start saving for retirement, the more time you’ll give your (now) friend interest to work its magic. For example, if you save $300/month toward retirement starting at age 25, you’ll have approximately $787,500 at age 65.
If you start saving the $300/month at age 30, you’ll end up with approximately $540,300. So by waiting five years, you’ve contributed only $18,000 less, but you end up missing out on $247,000. You’d have to save $437/month starting at age 30 to get what you’d have with $300/month starting at age 25.4
A few tips on how to start saving for retirement now:
Get that employer match: Many employers offer a 401(k) match as a benefit to their employees. For example, your employer may contribute 3% of your salary if you contribute the same amount out of your paycheck. That’s FREE MONEY! An immediate 100% return on your investment. Don’t miss out on it.
Make it automatic: For years, I was contributing just enough to my 401(k) to get the employer match. After that, I made it a goal to save enough to max out my Individual Retirement Account (IRA). The problem is that things kept coming up and I either saved less in my IRA than I had originally planned or not at all.
The solution? Increase my contribution to my 401(k). That way I didn’t have to make the decision to save every month. It was automatic.
Pay off toxic debt: If you have high-interest debt, get the employer match on your 401(k) then focus on your debt until it’s paid off. The reason for this is that if you’re paying 20% interest on a credit card, you’re likely not going to get a 20% return on your 401(k) to make up for it. If you have low-interest debt (7% or less), it isn’t as essential to pay off before saving more for retirement. This is because the interest you earn on your retirement account could end up being more.
Get on a budget: Budgeting is the foundation of your finances. If you don’t have money to save for retirement and you earn a decent income, it’s likely that it’s because you’re spending too much on something else. Check out this blog post to help you get started.
You only live once, and with people living longer these days than they ever have, that life is going to include a lot of retirement years (hopefully). The better you prepare yourself now, the better off you’re going to be when you’re tired of working. At that point, you’ll want to travel, spend time with family, or just sit around and do nothing. So start saving ASAP!
1. J. Reuben Clark, Jr., April 1938 General Conference, pg. 103.
2. U.S. Federal Reserve, “Report on the Economic Well-Being of U.S. Households in 2015“.
3. NerdWallet, “2015 American Household Credit Card Debt Study“.
4. The $300/month figure is for simplicity’s sake. You’ll definitely want to work toward 15% of your gross income, which I assume will increase throughout your career. In an ideal scenario, your employer will offer a 401(k) with a match. The calculation assumes a 7% annualized rate of return on your investment.