These 4 Moves Can Turn Every Paycheck Into Long-Term Wealth
Written by
Jake Safane
Edited by
Rebekah Evans
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It’s easy to fall into the trap of assuming that you need a huge paycheck to build wealth. The reality, however, is that with the power of compounding returns, even small amounts can turn into windfalls.
For example, let’s say you’re 22, fresh out of college and you set aside $100 per month into an investment account. If you keep doing that, by the time you might retire at age 65, you’d have over $700,000 if your investments earn an annual average of 10%, which is roughly the S&P 500’s historical average.
If you use the following straightforward, proven strategies, you can end up in a great financial position.
Just Get Started
Building wealth might seem daunting, but don’t let that concern freeze you.
“The first thing I would tell someone is to just start. Don’t overthink it and just do something,” said John Foard, certified financial planner (CFP), chief compliance officer and co-founder of Crown Advisors, LLC.
“Where I see most individuals stumble, when trying to build wealth for their future retirement income, is they get paralyzed while trying to evaluate every possible option available. The sooner you start saving and investing for your future, the better. The most valuable asset we all have is time. So, again, just start and continue to increase the amount when you can,” he added.
Even if you feel like your paycheck is tight, there’s almost always room for a modest contribution. “Even if you can only invest or save $25 per month, do it and start as soon as possible. The power of compounding returns is an amazing thing,” Foard said.
Automate Saving and Investing
Ideally, when getting started, you would do so by setting up automatic deductions and transfers. For example, enrolling in your company’s 401(k) plan enables you to send money directly into your retirement account with each paycheck. You could also set up bank transfers so that after every payday, for example, you transfer a certain amount into a separate savings account.
“Make it automatic, much like how your health insurance is deducted from your paycheck — that way it is out of sight, out of mind,” Foard said.
Bucket Your Savings
As you build the habit of saving with automation, consider bucketing your savings based on different goals.
You should have a plan of action for your savings, instead of treating it as a random pot of money, Foard explained.
One simple yet powerful plan, he said, is to group your savings into three categories: now, soon and later.
That means setting aside some funds for right now, like everyday bills and obligations, Foard explained. The soon bucket is for funds you might need in the near future, like for home repairs or other unexpected expenses. The later bucket is more of the long-term funds that can be invested for retirement.
This type of split can also make deciding between saving versus investing easier. In some sense, it’s all part of setting money aside, but you would generally save in relatively safe vehicles like a checking account for “now” funds. “Soon” funds could be put into a high-yield savings account or conservative investments like Treasury bonds. “Later” funds could then be invested more aggressively, such as in stocks, given the long time horizon.
If you’re just getting started with savings, you might prefer to move through these categories sequentially, such as building up an emergency fund as part of your “soon” funds.
“Unexpected expenses or emergencies derail wealth building more than anything we typically see other than bad habits. Once you have an emergency fund in place, you can fully concentrate on funding your “later” funds,” Foard said.
That said, you might try to save some money across all three categories, depending on the situation. For example, you might deduct enough from each paycheck into your 401(k) to get your full employer match, but then before investing more there, you might first fill up your emergency fund.
Invest in Retirement Accounts
As alluded to, investing for retirement is a key part of turning every paycheck into long-term wealth.
“First, this will accomplish the ‘out of sight, out of mind’ setup so you are automatically putting funds away for your future, without having to think about it. Second, most companies provide some sort of matching on your contributions, which helps compound your efforts even faster,” Foard said.
Also, the tax benefits of investing in retirement accounts often make doing so more affordable than you might assume, even if you have a relatively small paycheck, Foard explained.
Your company’s retirement plan might offer resources that can help you calculate the effects on your net paycheck or you might consider booking time with a financial advisor to help you get your automated savings and investing strategies in place.
Even if you don’t have access to a workplace retirement plan, there are other ways to save for retirement, such as in an individual retirement account (IRA), which also provides tax benefits.
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