Today your task for America Saves Week is to understand why you should begin to save early on in life and how to begin regardless of age.
As part of America Saves Week, we’re working to help consumers get started towards saving for the future. And when saving, the best thing you can do is start early. If you make an effort to save early in life, you don’t have to set aside nearly as much money. Every year you wait, the more you have to come up with to meet your savings goals.
We know it’s tough to convince young people to think about the far future, so we’ll let the math demonstrate our point.
Compound Interest and Savings
When talking about long-term savings, it’s helpful to understand compound interest. Specifically, the “rule of 72.” Simply put, the rule of 72 teaches us how long it will take to double your investment. Simply divide 72 by the annual rate of return and you have your answer. If your investment carries a 10% interest rate, your money will double in 7.2 years (72/10) Most investments won’t bring 10%, so you’ll need more time to see your savings double.
Consider the following chart, which shows how long it will take to save $1,000,000 for retirement. On the left, you’ll see what your contribution needs to be if you start at age 19, and on the right the calculation assumes you wait until you’re 39.
If you add up the total contribution on the left, you’ll see you only have to deposit $53, 909 over 45 years if you start at age 19. If you wait until 39, you’ll have to contribute much more-$222,966 to reach the same goal.
This chart assumes a 10% rate of return, which may be a tall order for most retirement accounts, but the point is that you have to set aside much more money every year if you wait.
Let these numbers sink in, and try to convince everyone you know that starting early is the best way to build savings and reach their financial goals.