This post right here is without a doubt an important piece of information for anyone who is in their early twenties. In fact, once past the age of 30 you will only receive diminishing returns in using this information here. With that being said, I will bring you the facts at hand.

In saving for your retirement it is absolutely essential that you begin saving at a young age. The reason this is compound interest.  Investing earlier allows more compounding periods and more compounding periods allows your money to grow faster! In the two examples provided I am using the age of 25 as young, but believe me the earlier the better. Also these assume all the interest is reinvested and not paid out.  Lets take a look at the first example to see why starting early is so important.

The graph below shows 3 individuals who invest $1,000 per year until the age of 65. The rate of return on these investments are a modest 7% and taxes and inflation are ignored. The key is is the difference of age at which each person begins saving. As you can see by the chart, one person begins at age 25, another begins at age 35, and the last person begins at age 45.

Source: Investment Company Institute

The difference in each persons value at age 65 is dramatic. Simply by starting earlier and only using an extra $10,000 of their own money the person who begins at age 25 has double of what the person who starts at age 35. By using these numbers it comes to approximately an extra $112,000 by age 65. Lets look at another example that is even more eye opening.

This example uses two people, one who starts at the age of 25 and invests $1,000 per year until the age of 35 then STOPS. The person never invests any more of their own money and just lets what they have sit there. The second person begins at the age of 35 and invests $1,000 per year until the age of 65. Our first person has invested $10,000 of their own money while our second person has invested $30,000 of their own money. Using the same 7% rate of return and ignoring inflation and taxes the person who started earlier but invested less money actually has more money by the age of 65.

Source: Investment Company Institute

I hope these two examples illustrated the importance of saving earlier. The more money you get in earlier allows more compounding periods and gives you much more money in the long run.

October 30, 2015 at 9:45 am by admin
Category: Personal Finance