Welcome to the real world grads! No, no, no. Not the Real World, the REAL WORLD. The one where you become financially independent (hopefully, sooner rather than later), work at a job (ideally one that’s full-time, in your desired field, and has benefits), live on your own (your mom is begging you to do this), save for retirement, and create your own life.

It’s a fun and exciting time. It can also be an overwhelming time. Suddenly you’ve got all the choices you’ve ever wanted, but you own the consequences of those choices too. You can stay out all night long on a Tuesday, but you still need to show up to work on Wednesday morning, even in your hungover state. Trust me, just say no to this plan. At least stop drinking early in the night because there’s nothing worse than going to work hungover when you also haven’t had any sleep. So I’ve heard.

If your first weeks and months in the real world are like mine were, you’re receiving lots of advice. Create a budget and stick to it. Take your lunch to work so you don’t blow your paycheck on eating every meal out. Live beneath your means. Buy insurance now. Develop healthy relationships.

It’s all excellent advice and you should take it all. You think you know it all, but like the rest of us who were ever your age, you don’t.

The most important advice that I beg you to listen to is this: Invest in your retirement now. 

Taking care of your money now will allow you to reap benefits for decades to come. Yes, you grew up in a generation with almost instant gratification via text messaging, smart phones, fast food, instant streaming, and much more. The problem with instant gratification is that it’s all about the here and now. There is no thought given to tomorrow or six months or sixty years from now. Now that you’re in the real world, though, it’s time to learn about and focus on delayed gratification and learn it quickly.

I know you’re 22 and you think you’ve got 100 years to save, but you don’t. Those years between now and 65 (or whenever you decide to retire) are going to fly by and life just gets more expensive. Right now, you’re probably single without kids or pets, you don’t drive an expensive car, and you probably aren’t worried about house maintenance costs because you’re renting and splitting the rent with a few roommates. Eventually though, you’re probably going to get married, have a kid or two, get a pet, drive a few cars, take fancy vacations (that your parents won’t pay for), and buy a house.

If you don’t start saving for your retirement now, you’ll regret it later on. And you’ll regret it in a very very big way.

Let me tell you a little story from my own life.

When I was 22 and going through the on-boarding process at my first job, a very nice human resources person reviewed my benefits package with me and told me about this thing called a 401(k). I had no idea what this was and depended on her to educate me. My parents and grandparent hadn’t told me about it — they came from a generation with a pension fund provided entirely by their company. Their advice was get a job with a good pension and open a savings account with a rainy day fund.

The nice HR lady told me that I could put pre-tax money into a 401(k) account via direct deposit from each paycheck and my company would match what I invested up to a certain percent. I don’t remember what that percent was and it’s not important. She then explained a concept called vesting to me. Vesting, as I understood it, was the amount of time I had to stay at the company before any of this money — that is the money I personally invested and the matching funds contributed by my company — was really mine. The vesting time at my company was five years.

I had no plans to remain at my company for five years and, having gotten a B- in my Econ 101 class, I knew that putting money into something where I’d lose 100% of my investment if I left in two or three years, was definitely a bad investment. So I didn’t do it.

Fast forward to five years and one day later when I left my firm. That’s right. I stayed at my company for five years and one day. And during all of that time, I never invested in the 401(k). I would have been fully vested on my five year anniversary, but I wasn’t because I didn’t invest.

Why didn’t I invest? Let’s look at the mistakes I made:

1. I did not know anything about a 401(k) and I relied solely on what I heard the HR person say. She probably was not an investment expert and probably didn’t know much more than I knew. Why I was relying on her for educating me? I should have done my own research and contacted someone at my company’s 401(k) company to confirm what I heard and make sure I understood.
2. I misunderstood the definition of vesting. This small misunderstanding has resulted in a large financial loss to me (see below). What I understood from my five minute meeting with HR. If I left the company sooner than five years, I’d lose not only what my company matched, but also all the money I invested in the 401(k). That is simply not what vesting means.
3. Based on my misunderstanding and the fact that I planned to leave my company in just two or three years, I did not invest.

My biggest mistake was completely misunderstanding how vesting works.

Here’s how it actually works: You invest money into your 401(k), which you’ve carefully diversified to mitigate your risk, and your company matches a certain percentage. If you leave prior to the date on which you become vested (make sure you know exactly when this is), you’ll lose only the portion your company contributes. The money you’ve invested is still yours. A slight difference from what I thought, but one that makes all the difference.

What would have happened if I’d invested in a 401(k) 21 years ago when I graduated from college? Let’s do the math. We’ll use simple numbers.

If I’d invested $2,000 each year for the five years, and my company matched the $2,000 each year (for a total of $4,000 invested each year), when I left after 5 years and 1 day, I’d have $20,000 assuming I had chosen the most conservative guaranteed investment option.

But let’s look at it a little differently. If that same money had been invested monthly through my paycheck for five years, that’s $333.33 per month ($4,000 annual contribution by me and my company spread out over 12 months), with an average return rate of 5%, today (21 years later) that $20,000 would be worth $50,658.92, even if I’d never invested another penny after leaving my first job.

If I choose to retire at age 67 and never added another penny to that initial $20,000 investment over 5 years, still assuming an average rate of return of 5%, I’d have $163,380.07 in 45 years. If I’d earned an average rate of return of 10% for 45 years (from age 22 to 67) on that initial $20,000, I’d have $1,215,762.28 at age 67.

Think I’m wrong? Check my math and see how your investments will grow here.

Because I didn’t understand vesting, I made somewhere between a $163,380.07 and $1,215,726.28 mistake. $163,380.07 isn’t enough to fund anyone’s retirement, but $1.2 million is a hell of a nice nest egg.

Pay yourself first by saving for your retirement. If you take your lunch everyday rather than eating out, you’ll save approximately $10 daily. Take that $10 each weekday and you’ve got $200 or so each month. Invest it aggressively for the long-term (you’re young, you can and should take risks) through an automatic investment from your paycheck and you won’t even miss the money.

Would you rather have the instant gratification of a salad at Panera today or delay your gratification and know that you can retire in a financially secure position?

I thought so.

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