Time. It is one of the greatest tools most of us have when it comes to saving and investing. Thinking about long-term goals can seem like a distant dream, but we are always better off working towards them early rather than waiting. In the long run, very few people have ever regretted preparing and investing well ahead of time, so don’t miss the opportunity.
Within the recipe of time, the secret ingredient is compound interest. Compound interest is the process by which a sum of money grows exponentially due to interest building upon itself over time (Richmond).
For example, Katie invests $100 and receives an annual rate of return of 5%. After one year, her investment will increase to $105 ($100 x 5% = $105). After the second year, her investment will be $110.25 ($105 x 5% = $110.25). This will continue year after year until after 40 years of compounding interest, her initial investment will have grown to $704. It may not seem like much, but most of us save much more than $100. If Katie made $100 contributions each month over the course of 40 years, Katie would have $152,917 saved.
Let’s review another example where consistent contributions are made over several years. Amy begins saving $200 per month in an investment account at age 25. Her cousin James begins saving $200 per month in an investment account but begins at age 35. Assuming a 6% annual rate of return, Amy will have $400,000 in her account at age 65. James, who started 10 years later than Amy, will have $202,000. If James would have started saving 10 years earlier, he would have been able to nearly double the value of his account.
These examples demonstrate how starting to save early gives us an incredible advantage when it comes to investment growth. It is also important to note all hope is not lost if we get a late start. Though it will require more money to be saved.
For example, if James wanted to have the same amount in his account as Amy by age 65, instead of saving $200 per month, he would need to save $400 per month. This may be do-able, but for some of us with a tighter budget, it could be hard to accomplish. Starting to save early helps to alleviate pressure off our future self to meet our goals.
Many people don’t have a lot of disposable income, especially young people who are paying off student loans or other debts. This topic is addressed in my article, Financial Planning Fundamentals: Building Positive Habits and Financial Confidence, which illustrates the importance of building positive habits early on, even if we don’t have a lot to invest. Whether we can spare $25 or $250, it’s a place to start. Time is a valuable resource we can’t get back. It can be a significant advantage and a friend if we let it.
In short, there is no time to start like today. Making the choice to begin is only one piece of the puzzle. Our door is open if you want guidance on finding the rest of your pieces and figuring out where they belong.
From the Desk of Sirra Anderson-Crum FPQP™
Richmond, Steven. “Why Save for Retirement in Your 20s?” Investopedia, Investopedia, 23 Jan. 2022, https://www.investopedia.com/articles/personal-finance/040315/why-save-retirement-your-20s.asp