If you want to save more, you have to start early! The key is the power of compounding, those who start saving in their earlier years can generate more money toward retirement and financial goals.
First things first, what is compounding?
Compounding is key when it comes to savings. It is often referred to as a snowball effect, which means that you receive interest on not only your original investments, but you earn interest on the interest earned. This helps you to grow your money faster.
The younger, the better.
Correct. Let’s say you are a person who starts in your twenties, well you have more time for your money to work for you. This is because the earlier you start, the more time you have for compounding to work in your favor. More importantly, know that you don’t have to put away a lot but you just have to be intentional.
Let’s look at an example (graphic) Courtesy of Moneyunder30.com
- Michael saved $1,000 per month from age 25 until he turned 35 and stop saving.
- Jennifer saved $1,000 per month from age 35 until she turned 45 and stop saving.
- Sam saved $1,000 per month from age 45 until 55 and stop saving.
- All retired at the age of 65 and earned a rate of 7%
Michael, Jennifer, and Sam each saved the same amount — $120,000 — over a 10 year period.
Sadly for Jennifer, and even more so for Sam, their ending balances were dramatically different.
Final tips to let compounding work for you!
- If you are a young adult who have just graduated from college or started your career, start saving now. Get used to living off of less, this is key.
- If you have been working for a while and may feel that you are unable to save, consider working to reduce your budgeted expenses to find ways to save more.
- Lastly, teach your children about the importance of saving and financial lessons that you have encountered and what they can do differently.