Here’s what your 401(k) does — and why you need to start using it immediately

When you’re young and just starting your career, it’s tempting to pass on starting a 401(k).

You’ve got more immediate financial concerns: student debt, making a home for yourself, simply paying your bills every month.

We get it. The rent is due in a few days. Retirement isn’t for a few decades.

But it would be a mistake to think that putting retirement savings off, even by just a year, won’t make a big difference. But a lot of people start their careers with the same mistake. 

A 401k is a retirement account most full-time and some part-time employees get as part of their job benefits package. It gives you the option to dedicate part of your paycheck each month for your retirement savings. Over the years, your money grows as it earns interest. It even follows you from job to job, like a faithful sidekick.

A lot of young workers put off starting their 401(k) because they feel broke. Student loan payments alone are enough to stretch an entry-level salary. But even if you don’t think you can’t afford it, do it anyway. Here’s why:

You’ll get free money

Does your employer make matching contributions? Many will match up to 50 percent of your 401k payments, up to a certain percentage. That means for every dollar you pay, your employer adds 50 cents. You’re basically getting paid to save.

If you’re not taking advantage of matching contributions on your 401(k), you’re throwing away free money.

It’ll have more time to grow

You’ve got 40 years or so to save for retirement. That might sound like a good excuse to put it off. But it’s an even better reason to start now.

Why? Because compound interest. When you pay into your 401(k), you earn interest not only on your contributions, but also on the interest you’ve already earned. Compound interest really makes your money snowball—and the more time you give it, the bigger your snowball grows.

Let’s do the math. Say you make $40,000 a year and contribute 10 percent of your income to your 401(k). We won’t even include employer matching (though, as we said, if your employer offers matching funds, take them!) If you wait until age 30 to start, you’ll end up with around $553,000 by retirement age. But if you start when you’re 22, you’ll end up with nearly $1 million. That’s the power of compound interest.

You’ll pay less in taxes (for now)

Feeling too cash-strapped to save? Here’s a fun fact: Contributing to your 401(k) actually lowers your taxable income, so you’ll pay less in taxes for the time being.

That’s because your contributions are tax-deferred, which means they’re taken out of your paycheck before your employer calculates your tax withholdings. You won’t have to pay taxes on your 401(k) savings until you start taking withdrawals. For now, that means a break on your taxes when you need it most.

You can take it with you

Maybe you don’t plan on cooling your heels long in your current job. Maybe you’ve already got your eye on your next gig. No worries — your 401(k) will follow you wherever you go. Anytime you leave your job, you can roll over your savings to your next employer or transfer it into a private investment account.

Even if you’re broke, your 401(k) is still one of the best things you can possibly spend money on right now. Start today, and stop throwing away free money!