We talk about our kids aging, another professional sports season upon us, or another school year starting. As we age it seems as if time goes faster.
Let’s take that feeling and use it to our advantage as we consider savings and the importance of starting early. 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 savings the importance of starting early 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.
Each of these investors ended their time horizon with $100,000. However, look at the difference of actual dollars they contributed. 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.
If you have questions about savings: the importance of starting early or making sure you’re on a reasonable path to retirement, you can start a conversation with Domani Wealth anytime! Call us at 1-855-855-5455 or email [email protected]m.