Some companies offer as part of their benefit package a 401k contribution matching up to a certain amount. This is usually a percentage. It could be a dollar for dollar match, or they could match fifty cents for every dollar you put in up to a max percentage of salary. In this example, let's say your company matches up to 3% of your pay. If they offer a dollar for dollar match for up to 3%, you have to take the opportunity.
This will be the best return you will ever get on your investment...a 100% gain instantly!
If you saw 3% of your annual salary on the ground would you pick it up? Free money!
As an example, your annual salary is $40,000. Your total for taking full advantage of your employer's matching would be $1200 for the year. In a year that has the normal 26 pay periods, this would break down to $46.16 per pay period. If you can contribute this much, which could be the result of making coffee at home instead of grabbing a $5 "fufu" coffee at the local coffehouse, you will be well on your way to starting your retirement savings.
Because of the power of the employer match, if you do this until you retire at 65, you could end up with around $250,000 in your account. These numbers reflect the following:
Age at start of savings: 32
Current retirement savings: $0
Rate of investment return: 5%
Annual salary increase: 2% -> which at your first raise would ratchet up your contribution per year by the small amount of $24
A 3% match is a pretty decent benefit to the employee. If your employer does not offer as much of a much, it is still worth it to contribute enough to obtain the full matching amount.
With this example you can see that the power of compound interest is amazing long term.
To highlight how powerful starting your savings earlier really is...
Take the same numbers, and start the savings at 22 instead of 32. This increases the amount put into your 401k by a comparatively small amount when you look at the gains possible.
You would end up with a whopping $477,000 if you started just 10 years earlier. That's almost double the amount!
What would happen if you waited until age 32 to start saving, but contributed double the amount? You would end up with $380,000 if all of the other numbers stayed the same.
As I hope I made clear, changing one piece of your savings behavior can have a huge long term impact. Above all, the benefit gained by starting your savings early cannot be overstated.
Simply, habitual contributions with compound interest will secure your retirement.
Not so simply, and up next time, a question from a reader "What the heck do I invest in?"
(I do not sell any investments, or any investment products. My hope is I can help some of my friends and family with advice that I have gained from lots of personal time spent reading and learning about my own personal finances.)