Every child is told that slow and steady wins the race, and this is especially true when it comes to saving for retirement. Saving a few hundred every month when you are in your 20s and 30s can yield a major return when compounded over decades. And yet the Federal Reserve found in 2018 that 40% of Americans cannot cover a $400 emergency expense, let alone save for 20 to 30 years of retirement.
In order to save for retirement, it is important to learn and develop good habits so they become habits and not something you must force yourself to do. Here are a few examples of good savings habits beyond just eating out less or living a more thrifty lifestyle.
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1. Kill Debt
Savings need time and consistency to grow with the power of compound interest, and nothing kills consistent growth than having to deal with sudden debt or major expenses. Before you can think about properly saving, you have to eliminate bad debt such as credit card debt or an auto loan first. And just as a slight tangent here: if there is any single area in your personal life where you can save money by living more simply, it is your car.
When it comes to eliminating debt, there are two different approaches. The more numerically sound approach is to prioritize the debt with the highest interest rate first. On the other hand, some individuals argue that the smallest debt should be paid off first. While you may end up paying more money over the long run, there can be a real psychological benefit to seeing your savings result in immediate gains.
Once your debt is under control, you should build up an emergency fund so that you will not be forced to withdraw funds from your retirement investments. A good rule of thumb is not a mere $400, but rather three to six months’ of expenses. This will also let you leave your job to search for a new one, which gets to the next point.
2. Earn More
Breaking news: if you earn more at your job, it is easier to save for retirement. Earning more is not enough in and of itself, as there are plenty of stories of individuals who make $100,000 per year but still somehow spend $101,000. But on the reverse, it can be hard to properly save for retirement even with good habits if your income is too low.
So how can you earn more? First, consider learning new skills. You do not have to go back to college or even take night classes to learn valuable skills. Skills such as coding, copywriting, and graphic design can be learned, for a low cost if not for free, and can make you that much more valuable within your company.
If you do not have the time to learn new skills, then you can earn more by switching jobs. The old model where employees stay with company for decades has been dead for decades, and new companies are willing to pay to attract new talent in this current economy. Fast Company reports that “workers who stay with a company longer than two years are said to get paid 50% less” than job hoppers.
3. Automate Saving
Young individuals aiming to save should absolutely participate in their employers’ retirement plan if the option is available. There is the obvious benefit in receiving essentially free money if the employers matches. But beyond that, there are real benefits in automating saving and having an employers put money into a 401(k).
By not giving yourself a chance to spend that money, you limit your ability to give in to your own weakness and splurge. Regular deposits will build up money over time, as an employer deposit of even just $100 per month can add up over time, especially with interest factored in. And as you see your account grow over time, it will help you understand the importance of saving. It is one thing to be told that regular saving will improve your long-term financial health. It is another thing to actually see it yourself in your larger retirement fund.
4. Don’t Think about the Stock Market
Your retirement fund is something for the long term, from which the benefits will be realized decades down the line. It is not a day trading fund, and you should not concern yourself with the latest stock market fluctuation one way or the other. In fact, David Weliver with Money Under 30 argues that young people should ignore the stock market altogether and focus on low-cost mutual funds. It is more important to regularly put money into your investment account, whatever it is, than trying to be a day-trading pro.
Even if you are in your 40s or 50s, you should not worry about any fluctuations. You still have at least 10 years until retirement, and no one today has any clue what the market will look like 10 years from now. Panicking during a major downtime will practically guarantee that you end up selling off your assets at the bottom of a bear market. And even if you are in your 60s and 70s and thus would be effected by any sudden fluctuation, that just means that you should put your money in reliable assets like cash.
There may be a stock market correction soon, as some experts have predicted may happen this year or the next. There may not. But the important thing is not to try to predict when it will happen, but to understand that it does not matter.