Monday, December 5 2022

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This is a mistake that those new to the job market should try to avoid.


Key points

  • Many people don’t focus on retirement savings when they’re young.
  • By neglecting my nest egg early on, I lost a great opportunity.
  • I regret not having funded my 401(k) when I had the chance.

My first job after university was not easy. I worked in finance, which meant long hours and stressful days. The bright side ? The pay was pretty good. Not only was my salary quite generous, but I was also entitled to an annual bonus.

The initial financial goal I set for myself at the start of this job was to pay off the debt I had incurred as part of my graduation. From there, I wanted to create an emergency fund with enough money to cover six months of bills.

Through careful budgeting and smart decisions (like choosing to live at home a bit after college to save money on rent and utilities), I was able to get rid of my debt in about six months. And a year later, I had my emergency fund full and I was ready to move out and rent a place of my own.

But one thing I didn’t do once I achieved those two goals was prioritize my retirement savings. After all, I was in my early twenties and retirement was the last thing on my mind. And also, after spending a solid year and a half maintaining an extremely frugal existence, I wanted to spend some of my hard-earned money on fun things, like travel.

So I decided to delay my retirement savings for a year. But in hindsight, it was a pretty costly mistake.

Don’t underestimate the power of time

Once I was in a solid position to start funding my 401(k) plan, there was room in my budget to contribute $500 per month, or $6,000 per year. Instead of putting that money into my retirement savings, I splurged on things like concert tickets and vacations. But it’s a decision I now regret. If I had funded my 401(k) with $6,000 at the time, at this point my retirement savings balance would potentially be $33,000 higher.

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I have always made a point of investing my retirement savings in stocks. Meanwhile, the S&P 500 (which is generally representative of the entire stock market) has averaged about 10.5% on an annual basis since 1957. So, shorting my 401(k) $6,000 for one year alone, I actually lost nearly $33,000 for retirement when we factor in lost earnings.

This is why people are advised to focus on their retirement savings from an early age. The earlier in life you invest, the more you can benefit from the compounded returns of your retirement plan.

Start slow if you must

To be clear, I don’t regret putting my 401(k) contributions on hold for a bit so I could shore up my savings account and pay off some stubborn debt. But I To do regret not having contributed to this plan once I was in a good position to do so.

Luckily, I got on the right track soon after and have been steadily funding my retirement savings since my mid-twenties. But if you’re new to the workforce and have the option of contributing to a retirement plan, it’s worth doing, even if it’s only $50 or $100 a month. You can always increase your savings rate over time, but the sooner you start, the more time you’ll give your money to grow.

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