Time flies! We all know and joke about it. “Where did the summer go?” or “How is it already Labor Day?” As we age it seems as if time goes faster. Let’s take that feeling and use it to our advantage. The concept of time value of money and the compounding of interest are very powerful notions that when combined with a savings plan can be important tools for successfully reaching financial goals in life. Saving early and often should be imprinted on our youth.
Here is an example that illustrates how saving sooner impacts the amount of money needed to reach a savings goal. Let’s say investor #1 saves $50 a month from age 20 to age 65. If we assume a 5% annual rate of return that compounds monthly, they would have approximately $100,000 at age 65. Investor #2 doesn’t start saving until age 30. To earn the same $100,000 by age 65, they would need to save $88 per month. Investor #3 starts their saving plan at age 40. They will need to save $168 per month to reach $100,000. Investor #4 waits until age 50 to begin saving. With only 15 years to reach the goal, they will need to save $375 per month. While you might think that all the investors saved a similar amount in total, this is not the case. Below is a chart to outline each investor’s contributions and the actual dollar amounts saved.
|Starting Age||Time Horizon||Monthly Contribution||Actual Dollars Saved Over Time Horizon|
|Investor #1||20 years old||45 years||$50 per month||$27,000|
|Investor #2||30 years old||35 years||$88 per month||$36,960|
|Investor #3||40 years old||25 years||$168 per month||$50,400|
|Investor #4||50 years old||15 years||$375 per month||$67,500|
Overall, investor #1 contributed less than half of the amount to their savings plan compared to Investor #4, while still ending at $100,000. This further emphasizes the point that saving early is the best way to achieve your savings goals. No matter where you fall on the scale, what is most important is to get started. Beginning those savings habits for life and sticking to them is key.
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Post Written by: Michael J. Dinan, CFP®