We are going to focus on pre-tax investing. Investing in a Roth account is definitely a great thing to do, but until you receive 100% of your company’s match, I would focus on the traditional retirement plan options.
Let’s take our example of $15 an hour and multiply that by 40 hours a week. That would be $600 of income before taxes. If you were to set up your automatic contributions at 3%, you would be adding $18 a week to your retirement account. $18 is definitely manageable.
It gets even better, though, since you contribute before taxes, you are not claiming the $18 as income. Let’s assume that you have a 20% tax rate (this will vary state, federal & payroll). Your paycheck will only be short, approximately $14.40.
| Rate | Hour | Wkly | 3% | Cost | Match | Total |
|---|---|---|---|---|---|---|
| $15 | 40 | $600 | $18 | $14.40 | $18 | $36 |
Since we are assuming a company match of 3%, you will be contributing $36 per week to your retirement plan. That is $1,872 per year, with compounding interest that can turn into a nice retirement plan in 30 years. Also, remember that your yearly income is only down $748.80 despite putting in $1,872. That may seem like a lot of money but read the next step to see what it can grow to with no further changes.
Step 2: Compound Interest