The Hidden Costs of Putting Off Financial Planning Until Your 30s
Engaging in financial planning is crucial in your 20s because it builds good habits, creates positive momentum and prepares you for the squeeze years of your 30s and 40s, when gargantuan expenses such as buying a home, having children and caring for aging parents put intense financial pressure on millions of Americans.
However, those who put off planning and participating in their own financial lives during their 20s miss out on preparation, foundation building and big money lost in the long-term.
Here are the hidden costs.
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Lost Growth and Compounding
The biggest danger in letting your 20s pass without financial planning is the loss of growth potential. Compounding — earning interest and returns on previously earned interest and returns — can turn small sums into vast savings, but it requires time. The more years you give compounding to work its magic, the better off you’ll be later in life — and the earliest years are the most crucial.
If you save $20,000 by age 30 and never contribute another dollar, you’ll have $562,000 35 years later at age 65, presuming 10% average annualized returns.
If you wait to start saving until your 30s and invest the same $20,000 at 40 instead, you’ll have just $217,000 at age 65 — a loss of more than half your potential nest egg due to just 10 inactive years.
Greater Pressure To Save Heavily
When you rob compounding of the time it needs to work its magic early in your adult life, you have to save much more to generate the same returns you could have achieved with comparatively small contributions had you started in your 20s.
The late-blooming investor from the previous example, whose money sat on the sidelines for 10 working years, would have to save more than $52,000 to get the same $562,000 at age 65 that the ambitious 20-something achieved with just $20,000.
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Missed Opportunities for Tax Reductions
Saving in an employer-based 401(k) or self-directed IRA allows for tax-deferred investment growth for retirement, but it also offers a tax advantage in the here and now that you’ll miss if you don’t participate in your 20s.
The IRS notes that contributions are made on a pre-tax basis and are therefore deductible on your federal returns. A worker earning $60,000 who contributes 5% of each paycheck has $3,000 less taxable income at the end of the year and, therefore, a lower tax bill.
Forfeited Matching Contributions
If you’re not participating in an employer-based retirement plan that’s part of your workplace benefits in your 20s, you’re refusing a decade’s worth of free money in the form of matching contributions.
Different employers use different structures, but Northwestern Mutual reports an average of 5%. The employee earning $60,000 who contributes 5% of their salary and deducts $3,000 in contributions also collects $3,000 in free money from their employer — every single year. Over the course of your 20s, that’s $30,000.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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