As young professionals, retirement may seem like a distant problem that only our bosses need to think about, but we don’t need to worry about it for years. This mindset, however common, is one of the greatest oversights facing the recent college grad.
Fool .com recently published an article entitled, “The Lure of Great Wealth.” This article touches on, among other things, a simple way for everyone to retire on time and with more money than many have ever dreamed possible. The plan is largely explained here in this excerpt:
“What does 15.4% compound to over a lifetime spent working in a job you love? If you were simply to maximize your IRA contributions (currently $4,000 a year) and 401(k) contributions (currently $15,000) over a 40-year working life span, from a standing start of $0, you’d have $37 million at the end. “
The average “twenty something” tends to forget the magnificent power associated with time value of money. Simply put, all money is not created equal. The income that a young worker makes at the beginning of his or her career is worth substantially more than the income made by that worker when he or she is a year away from retirement. The reason for this is interest. The money that is earned by a young professional at the beginning of his or her career accrues interest for the rest of that professional’s life (not just the last year). This means that money spent while you are younger has a greater impact on retirement than money spent when you are older.
This lesson should be applied to all purchases made as a young professional. The next time you find yourself with an extra wad of cash and an itch to go spend it on the newest gadget out on the market remember, don’t just take the cost of that gadget at face value. To get the true impact of the cost of that gadget, take its price and multiply it by your average yearly return on investment, then multiply that by the number of years until you plan to remain employed (40 years for most “twenty something’s”). This will give you the true cost of making the purchase.
I am not saying that “twenty something” professionals should spend their lives depriving themselves of things that make them happy. I am simply pointing out the importance of scrutinizing purchases made while you are younger. Besides, as “The Lure of Great Wealth” points out, the best way to have happiness as a young professional is not to buy things, but to make sure you have a job that you love. It would not hurt if that job has a good 401 (k) match either.
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Posted by dflish 
