One of my biggest pet peeves is when my peers say that they’ll start saving for retirement when they make more money. I explain the power of compound interests, cost-dollar averaging, and diverting any raises into savings before you have the chance to miss them. Eyes glaze over and the topic is quickly changed to that expensive kayak they’ve been lusting over.
Everyone has different priorities and mine happen to be health, fitness, and financial independence. I have worked hard to give myself options. I could quit working for a year, pay cash for a new car, replace the energy-sucking refrigerator, or go on an exotic vacation. I forgo most of these things because, in most equations, maintaining that potential for freedom is far more valuable than new stuff.
In my late-teens and early-twenties, I worked entry-levels job that didn’t utilize my degree. I lived with my parents and struggled to pay my bills. Yet, understanding compound interest, I contributed $50 to my Roth IRA religiously. I viewed investing as a non-negotiable bill. Though the amount appeared negligible for many years, the small amounts gradually added up. Perhaps more importantly, I built momentum by making retirement savings a priority five decades before I planned to retire.
When I finally got a promotion to management, the first person I called I was my financial adviser. I proudly informed him that I was ready to max out my Roth IRA. Soon thereafter, I boosted my 401k contributions and began diversifying my investments elsewhere.
So, what if you haven’t even thought about saving for retirement yet? Here are some tips to help you get started.
Eight Habits to Make Your Money Work for You
- Open a Roth IRA today. Contribute whatever amount you can afford and eventually work up to the annual maximum of $5,500. Contribute monthly to take advantage of cost-dollar averaging. Start as small as you need to, as long as you set the good habit into motion.
- When you receive a raise or bonus, automatically redirect the additional funds into one of three areas: loan payoff, investments, or savings. Currently, 33% of my income goes towards retirement, investments, and emergency savings. Seven years ago, I started at a 2% savings rate, but as I’ve tucked away the pay increases, it has quickly added up. Conversely, only 3.6% of my current income goes towards “fun” stuff like lattes, clothing, gifts, hobby supplies, vacations, and vehicle costs. This habit allowed me to pay off my student loans in two years, and my over-priced car in another two.
- Set priorities and make purchases in alignment with those priorities. Direct money towards things that are important to you and away from things that are not. I have a $7 bag of vegan chocolate chips, $160 trail running shoes, a $350 camping cooler, and $45,000 in investments. My priorities are healthful organic foods, outdoor adventure, and financial independence; these are the areas I am willing to splurge on quality and comfort. On the other hand, every single piece of furniture in my home is a hand-me-down, and my six-year old car is covered in dents and scratches that I have no intention of repairing.
- Keep a “Didn’t Buy” log and celebrate your sacrifices. When you forgo a purchase–say your morning latte or a trendy new blouse–write it down to acknowledge your discipline. My boyfriend and I put this unspent money into a vacation fund for weekend trips a few times per year.
- Create an ever-growing savings buffer. The Boots Theory of socioeconomic unfairness says that wealthy people with access to capital and disposable income can make decisions with their money that leave them richer and better off. For example, I bought several bulk-size packs of toilet paper on sale at a warehouse store this weekend, a luxury that someone living paycheck-to-paycheck could not afford.
- Once money is invested, don’t touch it. The market will fluctuate, but will ultimately increase over time. Put your money into an aggressive portfolio if you’re still young, and into a conservative portfolio if you’re closer to retirement. As the market dips, you will have more purchasing power, meaning those bear market investments will pay back larger dividends when stocks rise again.
- Hustle, bootstrap, and make some money. Generate multiple streams of income, whether this means working overtime to earn performance bonus, taking a second job, working freelance, or launching a business. I rely on income from my day job, work especially hard to secure performance bonuses, and supplement with freelance writing.
- Focus on “wealth” rather than “loss.” Sure, I could have a lot of fun with the $1,800 I invest/save each month. However, once I’ve met my basic needs and priorities, my focus is on building wealth. The money I save each month isn’t lost, but instead gifted to my future self, allowing her to buy that dream house, travel the world, and support loved ones who are struggling financially. When put into that perspective, skipping the latte doesn’t seem so bad after all.
The average net worth for someone my age is -$10,168. My current net worth is $57,245, which is more than $67,000 above the average. This is not due to blind luck, a debt-free education, a high-paying job, a wealthy family, or a loaded boyfriend. Instead, my above-average net worth is based on an intense discipline and a focus on providing for my future self.
It is never too early to prepare for the future, and it’s never too late to start. What’s one thing you can do today to make your money work for you?
What habits have have you put into place to build wealth and support your future self? What advice would you give to your younger self regarding money, if you could go back in time?