investing

How to Get Started Building Wealth

When you're just starting to earn money, saving may not be the first priority that comes to mind. But it should be.

Competing economic demands and limited income make it particularly difficult for young people to save. After all, you have to pay for a roof over your head, you may need (or want) a car, and you’ll have to pay what may seem like shockingly high amounts for necessities such as food, taxes and health insurance. But starting early is the key to building lasting wealth. And if you have access to a 401(k) plan, building a nest egg may be cheaper than you think.

 

That’s because many employers match worker contributions at a generous rate—usually between 50 cents and 100 cents on the dollar up to a set limit (commonly 6% of your pay). In addition, contributions are taken out of your check before taxes. Uncle Sam (and states with income taxes) act as if you didn’t earn the money, which lowers your tax bills.

Let’s say you earn $30,000 annually and contribute 6% of your pay to your retirement plan. That works out to $150 per month. Your employer matches your contributions at the rate of 50 cents on the dollar, adding an additional $75 to your account each month. Because your contributions cut your taxable income, you pay $22 less in federal withholding each month and, say, $5 less to your state. In the end, your 401(k) contributions reduce your take-home pay by $123 but your account grows by $225 per month.

If you keep just this modest contribution rate going until you retire 40 years from now, you’ll have just over $1 million socked away. (This assumes 3% annual salary growth and that you earn 8% a year on your money, or one percentage point per year less than the average annual return of a portfolio made up of 70% stocks and 30% bonds, according to Morningstar.)

So how can you find that extra $123 a month to save? Pack a lunch. Buy a used car rather than a new one (which will also save on auto insurance). Live with Mom and Dad—or add an extra roommate. Pare back your phone, cable, entertainment and clothing expenses. Repay your student loans more slowly by signing up for the government’s Pay As You Earn or income-based repayment plan if you’re eligible. You have numerous ways to squeeze $31 a week out of your budget, and the end result will be well worth the trouble.

Most Popular

4 Big Retirement Blunders (and How to Avoid Them)
retirement

4 Big Retirement Blunders (and How to Avoid Them)

It’s too bad, but financial advisers see these four mistakes all the time. Don’t fall into the same traps.
October 6, 2021
The 25 Cheapest U.S. Cities to Live In
places to live

The 25 Cheapest U.S. Cities to Live In

Take a look at our list of American cities with the lowest costs of living. Is one of the cheapest cities in the U.S. right for you?
October 13, 2021
The Best Vanguard Funds for 401(k) Retirement Savers
mutual funds

The Best Vanguard Funds for 401(k) Retirement Savers

Vanguard funds account for roughly a third of the 100 most popular 401(k) retirement products. We rank Vanguard's best actively managed funds, includi…
October 8, 2021

Recommended

How Congress Could Expand Medicare Benefits to Cover Dental, Hearing and Vision
Medicare

How Congress Could Expand Medicare Benefits to Cover Dental, Hearing and Vision

Democrats have included the proposal for the new benefits in their budget reconciliation bill. They also want to allow Medicare to negotiate lower dru…
October 21, 2021
11 Costly Medicare Mistakes You Should Avoid Making
Medicare

11 Costly Medicare Mistakes You Should Avoid Making

If you don't make the right choices, you could end up with high Medicare premiums and big out-of-pocket costs.
October 20, 2021
10 Year-End Moves to Lower Your 2021 Tax Bill
taxes

10 Year-End Moves to Lower Your 2021 Tax Bill

What you do between now and the end of the year can have a significant impact on how much tax you have to pay next April.
October 19, 2021
The Pros and Cons of Target Date Funds with Tony Drake
Financial Planning

The Pros and Cons of Target Date Funds with Tony Drake

The simplicity of target date funds has made them popular, particularly among 401(k) savers. But investors may be paying a price.
October 19, 2021