Why is it important to start saving early?
Because math says so.
If you’re in your 20s, you probably don’t think much about your retirement and how to spend those years comfortably. There are more important things to care about, after all. You’re still just starting your career and earning just enough money to get through the month.
How to turn $7000 into $100,000?
So why is it so important to start saving now? Everybody keeps saying it, and it feels like a right thing to do.
Just take a look at this chart. We wanted to find out how much you need to invest to get to $100,000 when you retire at 65. It’s not much, but it certainly is a help when you stop working.
If you’re 20 years old, all you have to do is gather $7265, put it in an investment plan that gives you 6% per year and in 45 years time you’ll get your needed $100,000. Not many 20-year olds have it, but it gives a perspective.
Because if you decide to start saving when you’re 40, then you’ll need three times as much money - $23,299 to get to $100,000 by the time you’re 65.
6% investment rate means that in every 12 years your money doubles. The sooner you start your investment; you give your money more time to grow. And the less you need to invest to get to earn what you want.
Math knows best: compound interest
How does it happen? Because of compound interest. It’s a simple arithmetic. You’ve heard about it in school, but it still is very underrated.
It’s a formula that calculates how big will something become if it will grow steadily for a particular period. Compound interest calculates the initial balance and the interest which it accumulated during the consecutive periods. Because of adding carrying charge deposit grows at a faster rate.
But not everybody wants to save by investing all their money. Some (maybe most) want to do it with little money, but regularly, every month.
Start investing early, the definitive argument
Does it make a difference? In fact, it only enhances the point that you need to start investing your money early. Yes, at first it requires a serious commitment and austerity, but when it becomes a habit (and you start earning more money), it’s an easy task.
If you want to have $100,000 in 40 years, all you need to do is to put $65 every month into your investment plan. It’s not a lot, right?
Look at this Investment Calculator. You can find out how much you need to invest every month if you want to get where you want to be when you decide to retire.
If invest your money for long enough, the interest will become bigger than the contribution to the investment.
There are very important things happening in your 20s, but a couple of thousand dollars saved in your early adulthood can mean hundreds of thousands near your retirement age.
And that’s why you need to save money when you’re young.