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5 retirement savings tips for 20-somethings

Even though retiring is the furthest thing from the minds of most twenty-somethings, you need to invest sooner, rather than later for one reason – you have an advantage over everyone else: time. Time to let your money grow exponentially. There is a reason Albert Einstein is credited with calling compound interest "the 8th wonder of the world." It can work either for you or against you. Those who understand it, earn it. Those who don't, pay it. Let me elaborate.

<p><small>Photo ©iStockphoto.com/LaraBelova</small></p>

By Michael Zaino, President & CEO, TZG Financial in Charlotte, NC

Even though retiring is the furthest thing from the minds of most twenty-somethings, you need to invest sooner, rather than later for one reason – you have an advantage over everyone else: time. Time to let your money grow exponentially. There is a reason Albert Einstein is credited with calling compound interest "the 8th wonder of the world." It can work either for you or against you. Those who understand it, earn it. Those who don't, pay it. Let me elaborate.

To understand truly how time affects money, let's look at Einstein's Rule of 72. This rule shows how long it will take to double your money, based on an anticipated interest rate. It's really easy to figure out and super-important to understand. In my opinion, it's one of the most important things to learn and apply throughout your life. For example, if you were to earn a 4% return on your money, it would take 18 years to double your money (72/4=18). With a 10% return, it would take you 7.2 years (72/10=7.2). That's how compound interest can work for you.

To see how it works against you, let's look at that nasty thief they call inflation. Inflation robs your purchasing power, because as inflation rises, the spending power of your money decreases. In other words, the same amount of cash buys less. An inflation rate of 4% will cut the purchasing power of your money in half over 18 years (72/4=18). If you come out of college at 22 and land a job making $50,000 a year, by the age of 40, you'd have to be making $100,000 a year just to maintain the same standard of living as you did when you were 22. Sound fair? Not really. But there is something you can do to protect yourself:

Invest.

Let's say you're a college student and you invest $10 a week while in college and earn an 8% rate of return that compounds annually. At the end of 4 years, you'd have a whopping $2,532! Not that impressive, right? But let's say you decide to continue investing just $10 a week for the rest of your life until you retire at age 65 (that's a total of 47 years, assuming you start at age 18, investing only $520 a year). That same $10 a week, or $520 a year, or $24,440 invested over a lifetime – no matter how you look at it – would have turned into $254,386. That's right, over a quarter of a million bucks.

Now, imagine if you invest more….

I absolutely love providing recent college graduates with advice on how they can better prepare for retirement. Although retirement is not even on the radar for most grads, those who have been exposed to at least minimal financial education understand the time value of money and how important it is to "just start." We live in a society of instant gratification, so it can be hard for today's young adults to resist the temptations they're presented with on a daily basis. If I can impart just one piece of wisdom, it would be to remember that money saved is more important than money earned. Even if you're making $100,000 per year, if you spend $100,000 per year, you're broke.

I can't tell you how many young people I see who, as soon as they land a decent job, run out and buy (umm, "finance") a BMW or (insert your favorite high-dollar ride here). As soon as they get a promotion, they upgrade their home (and their mortgage). Before they realize it, they're drowning in payments. How do you combat this? Live modestly. Don't try to "keep up with the Joneses" – after all, they're broke, too!

Some real advice for controlling spending? Take heed of these five suggestions:

1. Stop eating out so much! $5 breakfasts on the way to work, $7 lunches and $10-$20 dinners add up quickly! Pack a lunch. Learn to cook. Your wallet (and body) will thank you.

2. Do you really need that much Starbucks? Those Iced Skinny Cinnamon Dolce Lattes only make one thing skinny – your wallet!

3. If you buy anything using plastic, make sure you can pay it off within thirty days so as not to incur interest.

4. Look for ways to eliminate or cut back on monthly expenses (take on one or more roommates, commute to work, ditch cable, and shop for services in order to secure the best price).

5. Develop – and STICK TO – a budget. Know what you have coming in each month, and know what you have going out.

Now that we've addressed spending, let's look at how we can save more. These are five things you can do right now in order to turbo-boost your retirement savings:

1. START. Pay yourself first. If you wait until after your bills are paid and you go out on the weekends, you won't have anything left.

2. AUTOMATE. Designate a specific amount to be automatically transferred into a savings or investment account each month. There are apps and online tools to help you set this up.

3. PARTICIPATE. Take part in your employer's 401(k) plan, especially if they match your contributions – that's FREE money! If given the choice between a traditional plan and a Roth, go with the Roth – you'll thank me one day.

4. STAY DISCIPLINED. The more you earn, the more you tend to spend. That's just a fact. I'm not saying you should deprive yourself of the finer things in life, just budget for them. With discipline, anyone can accumulate wealth – no matter what you make!

5. GIVE. As crazy as it sounds, when you're living paycheck-to-paycheck, the more you give, the more you'll receive. If you can learn to live off of 70% of what you take home – by saving 20% and giving 10% to your favorite charity or church – I promise, you'll live a much more balanced and fulfilled life.

The good news for today's twenty-somethings is that you have time on their side…as long as you START.

This article was provided by our partners at MoneyTips.com. Read more stories from MoneyTips:
Why Your Children Need Their Own Roth IRA Now
You Can Check Your Credit Score for Free Now
7 Retirement Milestones

Photo ©iStockphoto.com/LaraBelova

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