You probably don’t want to think about retirement in your early 20s, but the truth is that you have more free time now than you’ll ever have later in life. That’s why this is the best time to start learning the basic buzzwords that your parents keep talking about. Here are the top words we believe you should know:
This is a plan for your retirement savings, and you can ask your employer to put your pre-taxed earnings into either of these accounts. This means that you reduce your taxable income today and decrease the amount you have to pay in taxes right now. However, this money is still going to be taxed, just when you take it out for your retirement fund, at which point you’ll be taxed at a lower rate because you don’t work anymore. If you decide to take money out of this account early, you are subject to pay penalty fees.
- Roth IRA
This is similar to a 401k in that it’s another retirement savings account, but the key difference is that you get to pick your brokerage firm and individual investment options. More importantly, you are putting post-tax money into this account, which means that the money in this account grows tax free. You can also take this money out at any time and incur no additional charges.
- Compounding Interest
Compounding interest is when your initial investment earns interest, which in turn gains more interest itself. Over time, you can exponentially accrue more wealth. As a college student, that means that you should start saving as soon as possible so that this process can begin giving you “free” money.