I banged out an email full of financial advice this week to a soon-to-be college graduate, who luckily has already lined up a job. She wanted to know if she should start saving for retirement as soon as she graduates.
Here’s what I told her: Absolutely!
I was thrilled that this young woman was already thinking about retirement. As a long-time financial journalist, I’ve been telling young people, including my own kids and nieces and nephews, for years that saving for retirement when you’re in your 20s can give you a huge financial cushion.
I thought I might as well turn my email response into a full-blown post of financial advice for college graduates so here goes:
Financial Tip No. 1: Start Early
The power of compound interest is the reason why young Americans, who start saving early, can amass a fortune. In fact, they can save dramatically less cash and be far richer than people who wake up in their 40s and 50s and realize they have to get busy stashing money away. (Most people fall in the latter group!) Think of compounding as a snowball that gets to roll down an entire mountain instead of just one slope. That’s going to be one big snowball.
Financial Tip No. 2: Start a Roth IRA. The first account you should open up is a Roth IRA. In life, there are certain things that are beyond indispensable. Like brake lights, hot showers, birthday candles and second chances. And if you’re saving for retirement, the Roth IRA, belongs on that list.
You can find out why in this old Roth IRA post that I wrote when I still had a personal finance blog. I know. I know. My abandoned blog looks awfully pathetic.
Financial Tip No. 3: Deposit automatically to the Roth.
Have a certain amount automatically withdrawn from a checking or savings account each month and deposited into your Roth IRA. Auto-pilot investing works wonderfully with 401(k)s, but many people don’t think to use the same strategy at home. Pay yourself first.
Financial Tip No. 4: Invest in Index Funds
I only invest in low-cost index funds. My kids’ 529 plans are invested in Vanguard index funds. The retirement accounts that belong to my husband and I are all invested in index funds. I recommend that your starter index fund be Vanguard’s Total Stock Market Index Fund. You’ll want your investments to become more diversified once you’ve got enough money to sink into two or more mutual funds.
Financial Tip No. 5: Use the Rule of 72.
If you’re wondering how fast your money can multiply, the Rule of 72 is always handy. This easy formula allows you to figure out how long it’ll take your money to double. Let’s suppose you expect your portfolio to earn an average 6% a year. In this scenario, your portfolio would double in 12 years. (72 divided by 6). In contrast, if you stuck your cash in a savings account earning 2% interest, the incubation period would be a very long 36 years.
Financial Tip No. 6: Use a Calculator
If you’re unsure how quickly you can attain your goal and/or you need motivation, plenty of online financial calculators can help. Here is a financial calculator that can help you figure out how fast your savings will grow.