Seize the opportunity by aggressively contributing to your investment accounts, including IRAs, in your early years before your expenses begin to pile up.
Saving a small amount of money now can give you more financial freedom later. Today you might be thinking about attending graduate school, starting your own business, or working toward your next promotion; but you can still look for opportunities to invest in your future. Although retirement may seem a long way off, starting an Individual Retirement Account (IRA) when you are young is a great way to begin your financial journey.
It's OK to start with small IRA contributions when you're in your 20s. Try to contribute what you can today and let your money potentially grow over time. Consider these tips:
- Make it automatic. Set up an automatic monthly transfer between your checking account and IRA. You can start with smaller amounts to get in the habit of saving and increase your contributions over time.
- Contribute refunds and bonuses. If you're getting a tax refund next year, look into having the IRS send your refund to your IRA account using direct deposit. Consider doing the same for any bonuses you receive from work.
- Create a spending plan. Be conscious of your spending habits to help you save money. Consider using budgeting tools, such as My Money Map ™, which is available to Wells Fargo accountholders.
Put time on your side
When you begin saving early, even small contributions you make can grow into a large amount of money — thanks to the power of compound interest and, with an IRA, tax-advantaged growth over time. Compound interest means that not only do your initial account contributions grow, but the interest earns money as well.
Consider the value of a Traditional IRA where you add $1,000 per year beginning at age 23. Your total invested funds at age 65 are $42,000, but in an account that earns 6% a year in compound interest, the value is $186,508. If you wait until age 44 to begin contributing and add $2,000 per year, your total contribution at age 65 is still $42,000, but the value of the account including interest is less than half: $84,785. The growth of your account has the opportunity to accelerate over time because you are earning 6% on both your original investment and the interest your account earns in the future. And all of that growth is tax-deferred.
The benefits of investing early
This information is hypothetical and assumes an annual return of 6% and a tax rate of 25%. It is provided for informational purposes only. It is not intended to represent any specific investment, nor is it indicative of future results. Distributions from a Traditional IRA are subject to ordinary income tax and may be subject to a federal 10% penalty if taken prior to age 59 1/2.