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Most of us know by now that compounding interest is a very powerful tool if you give it some time to work. Saving $1 today is worth a lot more thirty years from now. However, a lot of people I come across often talk about saving money and investing but when I ask them about it at a later time, I find out that they haven’t started. I ask them why and the most common answer is I just haven’t gotten around to it because I have all these other expenses. What we don’t often notice is that everyday life gets in the way of long term goals and the next thing you know, ten years have gone by and you still haven’t even taken the first step to your savings goals.
The Ten Year Difference
Let’s look at the impact that ten years can make on your overall savings or investments. For the sake of this example, we’ll ignore taxes. Let’s say John and Stan both want to retire in 30 years. John has a lot of expenses including a larger house and a nicer car than Stan. Because of this, John pretty much has no savings left each month after the bills are paid. Ten years from now, after realizing that he needs to get around to saving money, he finally cuts down on expenses and starts saving and investing. He puts away $800 a month into mutual fund that has a 10% annual return. When retirement comes 30 years from today, he would have $579,189. This is after 20 years of compounding interest.
Stan however, starts saving and investing $800 a month today and continues to do so for the next 30 years. At the end of 30 years, Stan would have $1,663,434. Because Stan started ten years earlier, he has almost three times the money John does. He started 33% earlier than John but ends up with 65% more money for retirement. Not fair right? This is because in compounding interest, the later years are the most powerful since the numbers are much larger. This means you need to start as soon as possible, preferably now.
Just do it
Nike had a point with that catchy slogan. When it comes to saving money for the future, you just have to do it. You have to find a way. Another excuse I hear is I don’t know much about investing, I want to learn more before I start. Fair enough. In that case, you don’t have to get aggressive and start getting into stocks and bonds quite yet. At least open an e-savings account and start saving there. Most pay around 5% APY nowadays, so put your money in there first and think about investing later. At least you’re earning something in the mean time.
Here are some ways to get started
- Practice forced savings: Set up automatic transfers into an e-savings account, or mutual fund so you’re forcing yourself to save every month.
- Stop living for the moment: You don’t need the big house, expensive car or fancy stuff. Cut down on your monthly expenditures and invest it, your future self will thank you.
- Try to build another stream of income with a part time gig like an internet or eBay business. Even if you make $500 extra dollars a month, invest that.
- Don’t just read about this stuff, go out and do it.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.