At the age of 18 (or even 30) the idea of saving a substantial amount of income seems like a pipe dream. The idea of retirement seems irrelevant. After all, you’ll be working for twice as many years as you’ve been alive so far. How can you contemplate two more lifetimes than you’ve already lived? With school, cars, work, friends, and now the requirements of health care put upon your shoulders, the idea of saving $1,000,000 or more dollars on your own may seem impossible, but I assure you, it can and will happen if you take just a few early steps and put your savings plan on cruise control.
Living Paycheck to Paycheck
Thirteen years ago a friend of mine was venting about living paycheck to paycheck. I knew her hours varied every month, as did her paycheck. Yet an increase in income did not yield an increase in savings. When I pointed this out she became even more flustered, wondering where her money was going. I suggested she set up a savings account and automatically deposited a percentage of her income from every paycheck into this separate savings. The savings should be hard to access, invisible to anyone else who had access to her funds, and should be untouched forever. Hesitantly, she gave it a try.
Months later I asked her how the savings was coming along. She was not a high earner at the time so my ambitions were a savings account in the hundreds of dollars, but she revealed to me instead that she had saved several thousand. She created a savings account, automatically put a little money in at a time, and at the end of each pay period and month when she noticed that the money was not only still there but growing, she was inspired and motivated to sock away more. The snowball effect started and her little nest egg went from a net negative to enough to cover almost any foreseen emergency within a year.
Seeding the Savings Account
The easiest way for any person to instantly create a savings account of value is to utilize the automatic deposit option from their employer. I constantly recommend this to every friend, family member and co-worker I talk to. My recommendation is to set up a retirement account with a ROTH IRA to give yourself a jump start on retirement tax savings. Inform your employer that you’d like to have a percentage of your income automatically deposited into your retirement account each month, fill out the necessary forms and you’re on your way. I suggest starting small to make sure you don’t overwhelm yourself. Over extending your contributions before you have developed strong budget habits can lead to regret and further money mismanagement. Having to pull your meager savings from a retirement account can lead to costly fees and penalties and will defeat the purpose. Start with 5%, reassess your monthly spending and see how things go for a month or two. After which, I recommend you spend the entire first year bumping up your contributions on a monthly or bi-monthly basis. You’ll probably find that all of your bills were paid and your lifestyle was largely unchanged at 5%. Try 7%, then 10%. See if you can creep the number up to 15% or even 20%. Before you know it, you are saving more money per month than you used to save in a year, and after the first 12 months you’ll have more saved than you thought you were even capable. All starting with these very achievable small numbers.
From Cruise Control to Millionaire
According to an AdvisorPerspectives.com article on US Median Household Incomes by Age, the median income for individuals in the 15-24 year old bracket was about $30,000 in 2010. If you saved 10% of your gross pre-tax income for a year, you’d have $3,000 saved. By utilizing Yahoo!’s retirement calculator online, you’ll see that a 20 year old making this average income saving 10% per year with a return average of 8% per year could amass a nest egg of over $1,000,000 by the age of 65. While nothing in life is guaranteed, there is a strong likelihood that your income will increase slowly over time as well. This is why I recommend you use the percentage based contributions instead of set dollar amounts. If you receive a $1/hr raise and have your account setup to deposit 10% of your pre-tax income, then your retirement contributions will automatically gain a $.10/hr raise as well. Automatic deposit into your retirement account is one very simple step towards a million dollar portfolio.