Savings: The Importance of Starting Early
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.
Important Disclosure Information
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Domani Wealth, LLC-“Domani”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Domani. Please remember that if you are a Domani client, it remains your responsibility to advise Domani, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Domani is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Domani’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request. Please Note: Domani does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Domani’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.
Post Written by: Michael J. Dinan, CFP®