Retirement is usually one of the furthest things on the minds of college students and new graduates. You got bills to pay, including possibly students and car loans. You might think that you’ll pay down your debts first, buy the house, and then save for retirement.
After all, you should be making a lot more money than you’re making now so you can catch up. Right?
Don’t become your own worst enemy.
The problem is that most people use debt as a crutch and delay starting their retirement by years. There are other expenses that come up and starting to save for retirement becomes next year’s goal gain and again. There’s a better and relatively pain-free way to get ahead now and in the future.
Once you have paid your high interest debt off; put a chunk of your money into a retirement fund. How much can you put into it?
Contribution Limits for 401(k)s
MSN Money offered these facts:
- 401(k)s allow you to save up to about $15,500 a year (the amount increases each year by an index tied to inflation) in pretax income. You won’t pay taxes until you start drawing on the money. Most employers will match a portion of your contribution. Similar plans exist for employees of small businesses and nonprofits, the self-employed and public employees.
- You can place up to $4,000 in pretax money a year ($5,000 a year starting in 2008) into an IRA.
The first thing you noticed was the $15,500 limit on 401(k)s. Most working college students don’t make $15,000, how could they possibly put that into retirement. The answer is that they wouldn’t (unless you have another source of income that pays your expenses).
Pay off your high interest debt first, before investing for retirement.
You can’t grow your money until you’ve gotten out of the quick sand. The average credit card debt for college students is between $986 and$2700. With credit card rates in the upper 20% and higher, it is smarter to pay this off first.
How much should you contribute into your 401(k)?
Start small and decide what will work well with your budget. Some experts suggest put 5- 10% of your paycheck into a retirement account. You can always increase the amount as you make more money. If you have a 401(k) policy that matches, then make the enough of a contribution to maximize that free money.
If you don’t qualify for a 401(k) at work, open an IRA. Just start getting into the habit of retirement saving and planning for the future. I get benefits (finally)starting next month at my job and I will sign up for the 401(k). I’ll also continue to put something in my individual retirement account.
How many people already have retirement savings started? How do you do it? Is it by percentage or is it a fixed amount?
Photo Credit: chefranden