This story is part of the CNBC Make It’s One-Minute Money Hacks series, which provides simple, straightforward tips and tricks to help you understand your finances and take control of your money.
Saving for retirement can be overwhelming. Experts recommend pursuing big goals like consistently saving 15% of your net pay and managing to put away 10 times your final pay total at 65.
But if you can’t currently spend 15% of your income on retirement savings, that’s okay. The most important thing is to start saving what you can as soon as possible.
Starting early is key because it allows you to take advantage of compound interest, which is when you earn interest on both principal and any accrued interest.
If you invest $ 100 and earn 5% in interest, you would have $ 105 at the end of the year. With simple interest, you would continue to earn 5% of that $ 100 each year.
But with compound interest, you make money based on the total amount in your account, not just your contribution. That means you now earn 5% of $ 105 and so on.
Let’s take a look at how that works out with your retirement savings. Let’s say you make $ 50,000 a year. If you contribute 5% of your pre-tax pay per year and earn a return of 6%, which is roughly the market average, you will have saved nearly $ 15,000 after 5 years.
After 10 years, that $ 15,000 will grow to about $ 34,000, and after 20 years, you’ll have nearly $ 97,000 put away.
If you want to work on suspending the recommended 15% of your income, one trick is to increase your contribution by such a small amount each year that you don’t even feel it.
Suppose you increase your contributions to 6% of your salary – just 1% more. After 5 years, you would have saved more than $ 17,000, a difference of $ 2,000. After 10 years you would have put away about $ 41,000 and after 20 years you would have saved nearly $ 116,000.
If you keep increasing your contributions 1% at a time, you will gradually build up to the recommended 15%. Most providers allow you to set your contributions to increase automatically so that they increase automatically every year. You can also choose to manually increase your contributions each time you earn a raise.
And you may not have to contribute the full 15% yourself. Many employers offer a dollar-for-dollar match on your 401 (k) contributions up to a certain limit.
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