Lucky for me, my parents taught me the importance of understanding my finances at an early age. I have memories of regular trips to the bank, as well as joining them while they were paying their bills at the kitchen table. I was taught how to do my own taxes after getting my first job at age 15. I didn’t start a retirement savings until I got my first job out of college, but I’ve picked up some useful advice that I hope you find beneficial. Here are my few pointers:
1. Budget
First things first is to determine your capacity to save. I was raised in the suburbs and my parents did pretty well, so I was used to a certain lifestyle. After I graduated college and moved out, it was hard for me to adjust to a different “low-cost” lifestyle. For those in that same situation, remember that it took your parents years, if not decades, of hard work to get up to the level that they are at. You can’t do it all straight out of school. Set your expectations accordingly. You probably don’t need that new car, the new TV, or the latest phone. Maybe you can skip cable altogether or the really fast internet connection. The bottom line is to maximize your bottom line. Spend less. Save more. Set a budget and hold yourself accountable. Don’t feel like you need to record every nickel and dime on an Excel spreadsheet, but find a system that works for you and use it.
2. Take advantage of free money
Most companies that are larger than 10 people offer a retirement plan. If yours does, make sure you’re using it and getting the company match at the very least. Don’t know if your company matches? Ask HR. For every month you don’t contribute, you’re giving away money. Also keep in mind that employer contributions do not count towards your annual contribution limit. So you can still save the maximum allowed (2017 = $18,000) and get your employer match.
3. Save now!
The most valuable retirement saving that you can do is the money that you can save in your twenties. Due to compounding interest, this money grows upon itself more than the money that you invest later in life. The extremely rough estimate by Fidelity for how much you should have in your retirement by age is shown below in a graphic taken from their article.
Keep in mind that this is not set in stone. Consider your own situation accordingly. Maybe you got a huge promotion at 29 or 30 and doubled your salary. There is probably no way that you are going to hit that savings mark in time. There are other good reasons why you haven’t gotten there at 30; maybe you were in grad school or you’re paying off a lot of student loans.
4. Check your investment expenses
Once you have gotten your account set up you will need to choose which investments to put your money into. First thing to look at is expense ratios. Fidelity is pretty good at making that pretty easy to find. I don’t have experience with other sites, so I won’t speak to them. Look for low expense ratios. Those funds will help keep fees low and more money in your pockets at the end of the day.
5. Make friends with a financial planner / adviser
Find someone who you can trust to help you with the minutia. There are plenty of experts who can help you decide what investments make sense to you. Let these people help you. If you are worried that someone will try to “sell you something”, choose a fee-only financial adviser. Not fee-based or commission-based. Fee-only. Make sure that this person is acting as a fiduciary and understands your goals. One of my go-to people in this area is Professor Kent Smetters, the Boettner Chair Professor at The Wharton School of the University of Pennsylvania. On his website, you can look through his list of “approved” advisers in your area.
Best of luck!
