This story is part of the CNBC Make It’s One-Minute Money Hacks series, which offers simple, straightforward tips and tricks to help you understand your finances and control your money.
The savings for retirement can be overwhelming. Experts recommend that you strive to achieve huge goals, such as consistently saving 15% of the salary you take home and being able to distance your final salary by a total of 10 times 65.
But if you can’t dedicate 15% of your earnings to retirement savings right now, that’s fine. The important thing is to start saving what you can, as soon as you can.
Early start is essential because it allows you to take advantage of compound interest, which is when you earn interest on both the principal amount and any interest accrued.
If you invest $ 100 and earn 5% interest, you will have $ 105 at the end of the year. With simple interest, you will continue to earn 5% of that $ 100 each year.
But with compound interest, you earn money based on the total amount in your account, not just your contribution. That means you will now earn 5% of $ 105 and so on.
Let’s see how this plays out with retirement savings. Say you earn $ 50,000 a year. If you contribute 5% of your pre-tax salary per year and earn a rate of return of 6%, which is approximately the market average, you will save almost $ 15,000 after 5 years.
After 10 years, the $ 15,000 will increase to about $ 34,000, and after 20 years, you will have almost $ 97,000.
If you want to deposit 15% of your recommended income, a trick is to increase your contribution each year by such a small amount that you will never even feel it.
Suppose you increase your contributions to 6% of your salary – only 1% more. After 5 years, you will have savings of over 17,000 USD, a difference of 2,000 USD. After 10 years, you would have about $ 41,000, and after 20, you would save almost $ 116,000.
If you continue to increase your contributions by 1% at once, you will gradually accumulate to the recommended 15%. Most providers allow you to set your contributions to auto-growth so that they automatically increase each year. You can also choose to manually increase your contributions each time you earn a raise.
And you may not have to contribute 15% alone. Many employers offer a dollar-for-dollar match to your 401 (k) contributions up to a certain limit.
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