The reason people save money is so that they can be independent, and not need to depend on the whims of government for their survival. Personally I don’t think anyone should rely on social security benefits to aid them in their waning years – in fact I think It’s important to not have to worry about money when you get older so you can enjoy the better things in life. That is why I get to this topic – first reason for saving should be securing yourself in the present. If you get fired from your job or if a family member gets sick and you need to cover medical expenses then this is a no brainer. Build up your emergency fund, as detailed in my previous post. After this build up your investment accounts, include among them a retirement investment account.
If you have no intention to use investment money until you retire, then go ahead and put all your savings (outside of the emergency fund) into a tax advantaged retirement account such as a Roth or Traditional 401k/ IRA. If you don’t know the difference, Roth 401k /IRA’s contributions are post-tax and the traditional 401k/IRA are pre-tax. When you cash out your Roth’s you won’t be taxed again, but when you cash out your traditional’s, you gotta pay whatever the tax rate is at the time.
You might consider splitting your retirement investment accounts in half, just in case taxes are worse in the future. The benefits of a traditional are immediate, as your taxable income is decreased based on how much you contribute to it. To find out more detailed information on this please visit here.
Now, to the juicy part – if you can score a 10% return on your investments then $1 today will be worth $45.26 forty years from now. How do I know that? According to math, the calculation for future value is (1 + k) ^ n , where k is the rate of return, and n is the number of periods. I’m keeping it simple, having the compound period equal the return period. You can learn more about future value here.
So investing early will score you big points with yourself when your in your 60′s begging yourself to retire. Take a look at a great chart that goes through the possible outcomes of your one invested dollar based on different rates of return without having to use a calculator here. I’ve taken the liberty to display a 10 percent rate of return over time using Google Docs and how it changes $1.