Save Smarter Thanks to Compound Interest

College is a pivotal time in life. You’re off on your own, probably for the first time, juggling adulthood, classes, new social circles, and possibly a part-time job. Maybe you switch your major after a few semesters as you start defining what you want your future to look like. There’s a lot on your plate, and thinking about your retirement seems a lot less important than your GPA and student loans. So how do you save for the future when there’s so much to prioritize, mentally and financially, in the next few years? Thankfully, you don’t have to major in finance to be smart about money and your future.

Compounding: The Secret to Working Smarter, not Harder

What if getting a head start on your future didn’t mean you have to be an investment expert or have a pile of cash lying around? Thanks to the power of compounding, you can get ahead simply by starting early, even if you don’t have much to invest. 

In the simplest terms, compounding means you grow your initial investment AND the accrued income along the way. Think of it in terms of a snowball: you start with your initial contribution to a Roth IRA. By the year’s end, you’ve earned some income, making your total investment amount larger than what you initially deposited, which, in turn, increases the amount of income you’ll earn if you get the same returns. Over time, your investment can pick up speed and continue growing without you ever touching it. This is, of course, hypothetical, and the longer you leave your investments to grow, the better chance they have at averaging out market highs and lows to yield better returns. Now, imagine how this scenario changes when you continue to add to your Roth IRA! 

Take a look at these examples:

Although each person theoretically saved just $200 a month, you can see the difference it makes to invest a little more aggressively when you have time to let your losses even out, stay consistent, and start early. Even if you have only $50 a month to invest, you can still start saving effectively for your retirement.

Smart about Timing

As you can see from Late Lyla’s portfolio, timing is everything. The earlier you can start contributing to your retirement savings, the better! But, that’s a little easier said than done, especially if you’re living off instant noodles in a dorm room. While building a budget might seem like a drag, it’s a crucial skill to have no matter what your income level is. Without a budget, money has a way of disappearing.

Assess your income and your expenses. The most important thing here is to be honest with yourself, so you can get an accurate picture of where your money goes every month and how much you need to cover costs like your cell phone, car insurance, gas, groceries, etc. Divide your expenses into wants vs. needs, and be realistic about the type of budget you’re willing to stick to. Track your progress so you stay motivated, and find what works for you! There are a lot of budgeting apps that can be helpful, or you can even start a fiscal fitness challenge with friends to stay accountable. Budgeting to include retirement contributions, no matter how small, is a good way to start putting compounding to work for your future.

Smart about Habits

Being smart about money has a lot more to do with the habits you maintain than the cash flow you have access to. Compounding is exponential by nature, but it can start to pick up speed when you make it a habit to contribute to your Roth IRA. Just look at Quitter Quincy’s account to see how much inconsistency cost his retirement! As we just noted, budgeting is a great way to stay consistent with your contributions. But what about those financial emergencies or challenges that throw off your rhythm?

It’s impossible to plan for every financial emergency. Or, is it? We like to use a four-bucket approach to help clients save for emergencies (think medical expenses, delays in financial aid, or a car breakdown) as well as irregular eventualities (new tires, insurance premiums, etc.). Saving up for life’s potholes can provide you with a buffer so you can keep trucking toward your goals instead of getting stranded thanks to a surprise expense. Once you have an emergency and personal escrow fund, it’s easier to stay in the habit of funding your retirement.

Smart about Planning

Starting early and staying consistent are both great ways to take advantage of compounding, but choosing the right investment for your needs is just as important. Nervous Noah’s savings still increased, but not nearly as much as they could have if he’d chosen more aggressive investment options. So how do you know what’s right for you?

Choosing the right investment strategy starts with defining your goals. What do you want your retirement to look like? When do you want to retire? What are you willing to sacrifice to achieve your goal, and what would you like to maintain as part of your lifestyle before retirement? Our goal plan process is designed to help you answer these questions and create a detailed plan, thanks to sophisticated, in-house software. After crunching some numbers, we can help you determine which investment strategy is most likely to help you achieve your goals.

More than Book Smarts

Last but not least, one of your greatest tools when it comes to being smart about money is to be a sponge: don’t be afraid to ask questions and seek out advice. Talk to your parents and grandparents, and reach out to their financial advisor. There are some valuable lessons to be learned outside of the lecture hall, and you don’t have to learn them all through firsthand experience! Take advantage of the wisdom around you to set yourself up for a brighter future, and, eventually, retire to your happy place.