One of the most power financial tools at a person’s disposal is compounding interest. In order to gain the full power of this tool, you need to start saving as soon as possible! Here’s an example to show the power:
If you start saving $500/year at the age of 25, by the time you retire at the age 65 it will be worth (assuming a 6% average ROI) just over $77, 000. If you were to start just 5 years later, it will be worth just under $56,000.
That’s a crazy difference! The difference in the money the individual invests is $2,500 yet the total difference is $21,000. Who wouldn’t want this!
This shows the power of compound interest and why you need to start saving as soon as possible. The later you start, the more of your own money that you have to work hard for needs to be contributed.
Now, why do people start so late saving? One reason is that there is this weird paradox when it comes to saving. It is that when it is most important for you to be saving, you earn the least and therefore the most difficult for you to give up a portion of your income to savings.
Then there becomes the issue of people thinking that the small portion of their income that they can do without isn’t significant and therefore and so they figure why bother. But that thinking is wrong!
Even if a person contributes $10 a paycheck to something earning 6% return a year starting when they are 20, it will amount to over $55,000. That is not insignificant.
So what are some tips that people can use to help with their savings? First, I would recommend, no surprise, start as young as possible. Contribute whatever you can – no amount is insignificant.
Secondly, once you get to a point where you have financial stability start deducting a regular amount from your paycheck and contributed that. At least 10% of your pay should be going to this but the more you can contribute, the more you will make your money work for you!
Lastly, if your company offers any sort of defined contribution retirement plan, take advantage of this to the fullest. You are guaranteeing yourself a 100% return (if they match your investment. If they only pay a percentage then you get percent return guaranteed). In the first example above, that $500 investment amounts to almost $150,000 if there is a 100% defined benefit!
The power of compounding interest is THE best pay to make your money work for you. Use it!