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In order to make informed decisions about 401(k) plans and other retirement savings strategies, you need to understand some basic financial concepts. One of these is the time value of money, the idea that money should increase over time. One good way to achieve this is using compound interest, where interest earned on the principal in an account is put back into the account, where it also earns interest.
Dollar cost averaging is a strategy for reducing risk when you invest over time. You will also need to understand the effects of inflation, and the differences among pre-tax, after-tax, tax-deferred and tax-free.*
The concept of time value of money is that, over time, you should earn interest on your money. Money invested in interest bearing vehicles begins to grow as soon as it's invested. The earlier you start investing in your 401(k) plan, the more time your money has to grow.
Look at the following chart to see the value in starting early:
|Starting Age||Ending Age||Total Contributed||Years Contributed||Estimated Value at Age 65|
Doesn't look right, does it? Depositing the same amount of money ten years earlier will give you twice as much money at age 65. This is the result of something called compound interest. The interest and gain you get on your money over the years keeps getting reinvested and earns more interest. Your principal earns interest and your interest earns interest. Over time it makes your money grow faster and faster. And the more years you have to make this compound interest cycle work, the more money you'll have when you retire. Use the time you have to your advantage by saving now and saving more.
*Dollar-cost averaging cannot guarantee a profit or protect against a loss, and you should consider your financial ability to continue purchases through periods of low price levels.
Securities and Investment Advisory Services are offered through LPL Financial, a Registered Investment Advisor, member FINRA/SIPC. Insurance products are offered through LPL Financial or its licensed affiliates. Heartland Planning Associates is a trade name of Heartland Bank. Heartland Bank and Heartland Planning Associates are not a registered broker/dealers and are not affiliated with LPL Financial. The investment products sold through LPL Financial are not insured Heartland Bank deposits and are not FDIC insured. These products are not obligations of Heartland Bank and are not endorsed, recommended or guaranteed by Heartland Bank or any other government agency. The value of the investment may fluctuate, the return on the investment is not guaranteed, and loss of principal is possible. The LPL Financial representatives associated with this website may discuss and/or transact securities business only with residents of the following state: Ohio. Check the background of investment professionals associated with this site on FINRA's BrokerCheck.
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