The earlier you start saving, the bigger your 401(k) can grow. Start small and let the power of compounding work for you.
If there is a magic ingredient to successful investing, it must be “time.” Quite simply, the earlier you start saving, the better.
Don’t make the mistake of thinking that you don’t earn enough money to save, or that retirement is too far away. No matter your age, NOW is the time to put money into a 401(k). Join your company’s 401(k) plan as soon as you can. Waiting even a few months could mean less money in your nest egg when you retire.
Why? It’s all about the power of compounding. Compounding allows you to make money not just on the money you contribute to your 401(k) but also on the money it earns (the “rate of return”). So, if you invest $100 and it earns a 5% return in one year, you now have a principal of $105. The following year, if you also earn a 5% return, you earn it on $105 (not just the initial $100) and you now have $110.25. As your principal grows, your gains will grow too, compounding your returns. The more time you have until retirement, the longer the magic of compounding can work, growing your savings faster than you imagined.
Even the smallest amount you can set aside each month has the power to grow exponentially over the years when you start young.
Want to know more about how compound interest works? Watch this video from Khan Academy.
* This example assumes an annual income of $25,000 (without increases), 6% contribution, 8–10% rate of return, and monthly compounding. This chart is for illustrative purposes only and is not intended to represent the performance of any specific investment. Actual returns will vary and principal value will fluctuate. Taxes are due when money is withdrawn.