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Time Is Money

By: Robert Westervelt

While starting a savings plan is most effective when started early in life, this is the time people are least interested. It used to be that people would live on 80% to 90% of their take-home pay and save the remaining 10% to 20%. Now, according to the federal survey of consumer finances, it is not uncommon for people to be living on 120% of their discretionary income! I have talked with many people who say they will start saving next year, or after they buy a new car, or when they are able to earn more money. Yet as the savings rate across America has continued to drop, this time to start saving seems to keep being pushed back. This procrastination and waiting can be costlier than most people realize.

The Cost of Waiting

Let’s look at what happens if a 22 year old starts saving $100 per month (at a 10% rate of return) towards retirement. By the age of 67, this monthly investment will have grown to over $1,000,000. Suppose that same 22 year old, though, decides to travel after graduating from college or wants to adjust to a new career and waits until the age of 25 to start investing the same $100 per month. By retirement, this investment will have grown to only about $780,000. Finally, waiting until the age of 30, maybe until after starting a family or buying a home, this $100 per month investment will have only grown to about $470,000 by retirement. Waiting just 8 years to start saving could cut the amount of money you have at retirement by more than half!

Time is Money

Let’s look at it a different way. Suppose you know that you want to have $1,000,000 by retirement at age 67. If you were to start saving at age 22, you would need to save only $96 per month (at a 10% rate of return). Waiting until age 25 to start saving would require this monthly investment to be $129 to reach the same $1,000,000. By the time you reach 35 years of age, this monthly investment would need to increase to $359 per month. Finally, if you did not start saving until the age of 45, you would need to save $1049 per month to be able to have $1,000,000 when you retire at age 67! The lesson here is that the longer you wait, the more money it will end up costing you to reach the same goal.

How to turn $33,500 into $4,000,000

Finally, here is something to think about for your children. If you were to open an IRA for your child the year they are born and contribute $500, this small one time investment would grow to over $350,000 by the time your child retires at the age of 67 (assuming a 10% rate of return). Taking this one step further and making this an annual contribution over 67 years, this $500 per year ($33,500 over the course of 67 years) would grow to about $4,000,000!

Hopefully, you can see the importance of starting to save early. Even a few years of waiting could cost you hundreds of thousands of dollars. A small amount of money, even as little as $25 per month, saved consistently over time can grow to more than you realize. The important thing is to start saving now, because you cannot afford to wait.

Article Source: http://thisarticle.com

Robert Westervelt has been doing financial planning for the past few years with a desire to help people get out of debt and achieve their financial dreams and goals. Most recently he has started a website www.easyfinancialplan.com to help families start developing their own personal financial plans.

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