Wednesday, October 29, 2008

Save Early

Tip #20 – The younger you are when you start saving, the better. Or, take advantage of the magic of compounding. Whatever age you are, the best time to start saving money is now. This gives you time to have the money grow. If you wait to save, then your money won’t have time to earn interest and it will be harder to accumulate a large sum. If you are in your 20’s, it is the perfect time to save. Don’t say that you will save when you are older and making more. If you save now, then you won’t have to save much when you are older. And if you are in your 30’s and 40’s then you definitely want to start your savings. If you are in your 50’s or 60’s or older, it’s never too late. Let’s look at some numbers.

Say you are 20 years old and you want to save $1000 each year (less than $100 per month!). If you put $1000 away at the beginning of each year for only 10 years in a bank account (after 10 years you stop putting away anything) earning 3% interest, then you will have :**

End of Year 1 - $1030 ($1000+ $30 interest)
End of Year 2 - $2090.90 ($1030 from year 1 + 30.90 interest + $1000 from year 2 + 30 interest)
End of Year 3 - $3183.90 (2090.90 from the end of year 2 + $63 interest + $1000 from year 3 + $30 interest)
End of Year 10 - $11,808
End of Year 20 - $15,869
End of Year 30 - $21,327
End of Year 40 - $28,661

That means when you are 60 years old you will have $28,661 for only saving $1000 a year for 10 years! Without interest or compounding interest (interest on the interest), you would only have $10,000 after 40 years. This is why the earlier you start to save the better, you have time on your side to earn interest.

However, if you are 20 years old and wait to start saving until you are 50 years old then you would need to save $2,400 per year for 10 years to accumulate about the same amount ($28,339) by the time you are 60.

The differences are even more dramatic at higher interest rates. If you put that money in a CD earning 5% interest, you would build more savings even faster.

The key here is to save early. Now of course you cannot go back to your 20’s. (Don’t we wish?) But you can start saving NOW! The earlier you do it, the more it will accumulate.

In Real Life (IRL) – When I was 21 I got my first job. I think I saved $250 per month – although it could have been $200 or maybe even $300, I really don’t remember exactly. After 1 year I became eligible for a 401K at my work. And I started putting money away in that as well (10% of my salary I believe). The 401K money came out before I even saw it, so I didn’t miss it. The other money I mailed off to a mutual fund each month. (I already had money in a safe savings account so I wouldn’t recommend a mutual fund for first-time savers). Over time, that money just grew and grew. I am now 41 years old. It has been 20 years since I started that savings. I haven’t been working for 5 years or mailing off money to a mutual fund for at least 10 years, but I know I have over $100,000 in those accounts that I stopped contributing to years ago. Now that I have 3 kids and no income, I'm glad that I scrimped and saved when I was young and had fewer expenses. The earlier you start, the better. Take advantage of the compounding.

**I used this website to help me make the calculations:

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