By Carmen Reinicke -
CNBC
+ Acorns
When a young person is in their 20s, saving for retirement is not on the list of financial priorities, if there is one.
However,
starting early
can give you the foundation for long-term success.
"It's totally understandable that it's difficult, because when you get your first job, it's not like you have money to spare," says Rob Greenman, financial planner and chief growth officer and partner at
Vista Capital Partners
in Portland, Oregon.
[See more from CNBC in Spanish: The importance of maintaining a good credit score]
Starting to save a little money from an early age could mean that, over time, you have to subtract less from your income and still reach a retirement sooner than you thought.
"Most of the people I talk to always tell me 'I wanted to start earlier,"
says Tess Zigo, financial planner at
Emerge Wealth Strategies
in Lisle, Illinois.
"Nobody says' God would have wanted me not to invest in my 20s," he says.
Archive image of several piggy banks in San Francisco, California.Getty Images
The value of compound interest
The reason it's important to start saving sooner is that having a longer horizon gives compound interest more time to grow.
Compound interest is when the interest you earn on your brokerage or investment account balance is reinvested, earning more interest
.
It is money making money.
This interest rate also accelerates the growth of your savings or investments over time.
Let's say you invest $ 100 at an annual growth rate of 10%, which means that in one year you will have $ 110.
In two years it will be $ 121 and in the third $ 133.
The amount will grow more each year due to compound interest.
This also means that you can save less when you start because there is more time for your investments to grow.
For those in the early stages of their careers who are unable to consistently save,
saving what they can as soon as possible is the way to get started on the right track.
[These taxpayers must pay their taxes before April 15th despite the IRS extension until May 17th]
"Compounding works in such a way that the earlier you start, the less you have to save at the end," Greenman said.
By using the 'Rule of 72', a formula for calculating how long it takes for money to double, you could expect your investments to double in 10 years, Zigo explained.
If you start saving at 20 and hope to retire at 60 you can have four decades of money that doubles.
But starting a decade later means you would be missing a chance to double.
Building good habits
[See more from CNBC in Spanish: How to avoid falling into the trap of buying flooded cars]
Although you may not be able to save hundreds of dollars each month at first, setting aside at least a little for retirement can help young people develop good financial habits.
It can show you the benefits of saving and allow you to build other funds, like money for emergencies.
You will also need to have a budget, which will help you stay in line and avoid long-term debt.
And seeing your retirement money start to grow can encourage you on the path to financial freedom.
"It encourages you to continue," Zigo said.
These tips can help you make the transition from home office to face-to-face work
Aug. 18, 202103: 31
Get started the easy way
For most people, the easiest way to start saving for retirement is in an employer-sponsored 401 (k) plan.
Many get it through work automatically, which means that they
may not realize that they have been saving part of their salary for the future
.
If you have a plan like this, you want to make sure you are investing enough so that it is equivalent to what your employer contributes, which is basically free money that can double what you save.
[How will you survive when you retire? This way you can save for your retirement even if you don't have help from a company]
"It is quite difficult to have a 100% return on your investment otherwise," Greenman said.
If you don't have an employer-sponsored retirement account, financial experts recommend looking for a Roth individual retirement account.
In these types of accounts, you would put the money in (although most advisers would recommend an automatic transfer) and it would grow tax-free until your retirement.
The Individual Retirement Account 'Roth'
Roth-type Individual Retirement Accounts (IRAs) are a good option for young investors for several reasons.
They are available to people who meet certain income limits, so it makes sense to open one when you start your career.
To qualify in 2021, adjusted net income must be less than $ 140,000 for individual taxpayers and $ 208,000 for those who are married and do it jointly.
Money put into a Roth IRA is taken out of pay after taxes, which means there is no debt to the Internal Revenue Service (IRS) when retirement funds are withdrawn .
Any money that comes in can be withdrawn, if the interest earned is not touched immediately
.
This is how the labor market reacted in the states where unemployment benefits were suspended
July 21, 202101: 13
You may have to pay income tax if you withdraw it before you reach retirement age of 59½ or if you've had the account for five years or less.
Then you can withdraw your money, contributions or earnings, tax free.
"Knowing that you have the flexibility to use it gives a lot of people the ability to just let it grow," explained Linda Erickson, certified financial planner, and founder of
Erickson Advisors
in Greensboro, North Carolina.
[Job offers skyrocket in some sectors: how to make a career change?]
Individual 'Roth' Retirement Accounts also offer more flexibility in terms of negotiation versus an employer sponsored plan.
This is beneficial for people who want to transact frequently or want to secure their portfolios to meet ethical standards, Greenman said.
Sure, this can be a problem if people take risks.
"You have to be careful not to fall into the mistakes that many make, which is trying to time the market when choosing stocks to buy," Greenman warned.
This article is part of the
Invest in You Ready series.
Set.
Grow
(Invest in you: Ready. Done. Grow), an initiative of CNBC and Acorns, the microinvestment app.
NBC Universal and Comcast Ventures are
Acorns
investors
.