We are constantly bombarded with financial advice from just about everyone we meet throughout our lives. Some are good, some are trendy, and some are big red flags that should send you running the other way. Though there is one piece of advice that does rise above the rest, that is the importance of starting to save early in life. No matter the size of your piggy bank or weekly deposit, simply starting as early as possible can save you hundreds of thousands in catch-up contributions when you are nearing retirement age.
Say you're starting a new job just after getting out of college. You've had jobs before in school, but they were all hourly. You did your best to manage your money, putting a little aside here and there, because you always heard that saving is essential. This new job has something new, though, retirement benefits! Your HR manager tells you that it comes directly out of your paycheck, so you never even have to see the money in the first place. It goes straight to your account and starts working hard to earn interest and grow.
But you're only 23. You enjoy going out on the weekends, and man, that check would feel a lot better if it had that $50 left. Ultimately, you decide that retirement is a long way off, and you have a lot of time to save down the road, so you decline the option to contribute to a retirement plan, keeping the money in your pocket where you can see it (and unfortunately, spend it).
What was the cost of this decision? When we consider the principle of compound interest, the cost can be rather substantial. Fast forward three years from our earlier scenario. You're 26 and have begun to evolve in your personal life, envisioning the possibility of dependents either soon or in the not-too-far future. The reality of money is different for you now than it once was. You finally decide that now is the time to start a retirement plan, you set up your contributions, and off you go saving for retirement.
Let's look at the math: if you started saving $100 a month when you were first hired at 23, with the plan to retire at age 65 (let's use an example of an 8% interest rate, compounding annually), you would have a total savings in that account of $365,092.23 at retirement. Instead, you waited until 26, and that short three-year period shrank that potential account balance to $286,729.47. Your three years of having that extra $50 in your paycheck every two weeks cost you $78,362.76 in lost earned interest!
Compounding interest is the financial form of rolling a snowball. You take just a little clump of snow and start rolling around. It grows slowly as it gains more surface area for more snow to stick to, then grows more and more rapidly with every roll until you have the base of a snowman. Every time you add to the total balance, you aren't just getting interest on that one contribution. You earn interest on the account's entire balance; more money grows, more money!
Starting a retirement account as early as possible while making regular contributions is the key to living the happy and healthy life in retirement that you so deserve for your years of hard work and providing for your family. Paying yourself for your future is always important, but so is giving yourself regular raises, just like you would expect at work.
ValuTeachers is here when you are ready to start saving for your future. We would love to have the opportunity to help you secure your retirement dreams.