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When you’re in your 30s and 40s, saving for retirement isn’t usually a top priority. That’s understandable. When you’re focusing on career growth, homeownership or starting a family, retirement planning is going to fall to the bottom of the pile.
But that could turn out to be a problem. Thanks to compounding interest, it’s during these two decades that saving matters the most.
A common misconception is that the amount you contribute to a retirement plan matters more than when you start saving. But consider a $300 monthly contribution to a 401(k) with a 7% rate of return. If you were to make that contribution beginning at age 35, you would have $340,000 in your 401(k) at age 65. That number drops to just more than $147,000 if you begin saving at age 45.
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This illustrates how even seemingly small decisions can have a significant long-term impact. But where should you start looking to make changes in order to start saving sooner — and protect what you already have?
Track what you’re spending — and why you’re spending it
With so many moving parts during this stage of life, it can be difficult to track daily spending. However, small everyday choices and so-called “lifestyle creep” will influence long-term outcomes.
As our income increases, so can our lifestyle expectations and therefore our spending. It’s easy to compare ourselves to peers, but trying to keep pace with the choices others seem to be making comes at a cost.
Without knowing the financial circumstances behind those choices, what appears attainable may not be practical.
Thanks to social media, it’s easier than ever to see what peers are doing. On the outside, it seems as if everyone is upgrading their home, buying a new car, traveling or living luxuriously. But those choices might be backed by circumstances that aren’t immediately obvious.
Those peers could have multiple streams of income, generational wealth, reduced costs in other areas — or mounting debt.
Spending to keep up with peers often translates to spending beyond one’s means, especially when it goes untracked. If the behavior persists, long-term financial progress can be limited.
While it’s challenging, the goal is to spend less than what is earned. This gives you the ability to build savings, which can be used as a cushion in phases of uncertainty.
Protect what you have
Spending habits are only one piece of the puzzle, however. Income protection is often overlooked in this phase of life. Many people assume they won’t die early, get sick or injured, or become a caregiver, and that therefore their income will stay consistent.
However, unexpected events can disrupt income without warning.
Unfortunately, expenses don’t stop when income does. Growing bills can put pressure on savings, creating debt and derailing long-term goals. While these events may be less common, they can still occur in those earlier stages of life when financial responsibilities are at their highest — when you’re raising a family, paying a mortgage and managing debt.
This is where tools such as life insurance and disability insurance can provide a layer of financial protection.
Ultimately, many of the most impactful financial decisions we make don’t feel that important in the moment, but over time they also compound. To build a stronger financial foundation, focus on spending intentionally, protecting income and maintaining consistency.