5 Ways To Maximize Your Savings With Compound Interest

A Dollar Saved Today Will Be Worth More Than A Dollar Saved Tomorrow

There is a lot of financial insecurity out there for Americans moving towards their retirement years. This insecurity is not surprising given the fact that 75% of retirement aged Americans have less than $30,000 in savings, not to mention that 1 in 6 older Americans live on less than $22,500.  These are just two of the very frightening statistics that are out there. What’s worse is that one-third of all Americans admit to having absolutely no confidence that they will be comfortable in retirement.

 

These statistics are truly staggering and should be enough to scare the average American into a savings plan that begins today. If you feel like you’re behind the eight ball, please take heed. Every dollar that you start saving today will be beneficial to your long term financial stability.  The power of saving early is very real. Take a look (each example assumes a 7% annual return):

  • If you put $1 away at age 20, that dollar will be worth $21 by age 65.

  • If you wait until you are 30 to invest that same $1, it will be worth $10.68.

  • If you wait until you are 40 to invest that same $1, it will be worth $5.42.

  • If you wait until you are 50 to invest that same $1 and you’ll get a measly $2.76.This means that a dollar invested at age 20 is nearly twice as powerful as a dollar invested at 30 and 7.5 times more powerful than a $1 that is invested at 50.

How to Maximize Your Return on Savings: A 5-Step Plan

Saving early and intelligently requires a plan that will help you maximize the return on your savings.

Try following this five-step plan: 

1. Create emergency cash savings.  Emergency cash savings is the amount of liquid money that you will need for you and your family for six months of financial hardship. This money should only be used for true emergencies such as an exorbitant medical costs or a job loss.

Again, these funds need to be liquid in the event that you need them immediately, so be sure to keep them in a money market account or separate savings account. 

2. Set aside cash for any large expenses that you know that you have coming up in the next 12 to 18 months.  You may know that you have a large expense coming up the next 12 to 18 months. This could be anything such as house maintenance, a down payment on a house, a car purchase, or a large (but planned) medical bill. Be sure that you keep this money separated from your emergency fund. You will not want to use the cash out of your emergency fund to pay for anything that is not deemed an actual emergency. You will rest better knowing that you now have started your emergency fund and that you are setting aside cash for the big ticket item(s). 

3. Make the maximum contribution to your employer’s matching 401(k) program.  Once you've set aside emergency savings and cash for large expenses, you're ready to invest your savings. Check with your company to see if they offer a matching program. This is a huge benefit as a typical matching program is 50% of the first 6% of your income saved. If a 401(k) is not an option for you, seek out alternative investment options that will allow your savings to grow with compound interest.

4. Start funding a ROTH IRA.  A Roth IRA is an individual retirement account. Contributions are made with after tax dollars and can be withdrawn at any time without penalty. Once you reach age 59 ½, all withdrawals are tax-free, and there is no mandatory distribution age. Please note that there are income eligibility limits and that the Internal Revenue Service limits contributions to all retirement accounts, including ROTH IRAs. Be sure to do your homework before starting your contributions.

5. Once you’ve funded your ROTH IRA, go back and try to max out your 401(k) if possible.  In 2014, the maximum contribution was set at $17,500 (plus an additional “catch up” amount of $5,500 if you are age 50 or above).

Here's the bottom line: The earlier you start investing, the more it pays off for you.

The example I gave above with $1 invested was pretty simple, but imaging your return if you invested $1,200 per year. A simple annual investment of $1,200 a year for 30 years compounds to $194,211. Invest another 10 years and that investment jumps to $479,642 a year (based on the stock market's historical rate of return at 9%). 

Don’t wait until tomorrow.  Make a plan and start saving for your future TODAY.

Follow Wes on TwitterFacebook and at Wesmoss.com 

For valuable financial tools and information on how to set yourself up for a happy retirement, check these out:

Social Security OptimizerRetirement Calculator401k AllocatorHow Do I Stack Up QuizMoney & Happiness Quiz, and the book You Can Retire Sooner Than You Think

Disclosure:  This information is provided to you as a resource for informational purposes only.  It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors.  Past performance is not indicative of future results.  Investing involves risk including the possible loss of principal.  This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.