A quick financial lesson.Let's say you decide to invest in a Roth IRA, my favorite investment vehicle. You decide to start one today and invest the maximum $4,000 every year. You invest it wisely in an index fund that follows the total stock market which has historically returned 10% a year. In 40 years, your $4,000 a year, ($160,000 in principal payments) turns into $1,947,407.24, All of it tax free.
Now imagine if you were a good little saver and have saved the last 4 years. With a modest gain over the last few years you have $17,000 in your account. With the same investment strategy above you now have at the end of 40 years 2,716,814.59, All of it tax free. That is almost $800,000 difference for saving a little bit earlier. That $17,000 turned into $800,000!
Still not convinced? How about this? You do the above strategy from the ages of 25-35 and then stop. So for 10 years you invest $4,000 and then nothing after that. By the age of 65 you will have an account worth $1,223,633,58. Your $40K turned into $1.2 Million.
Or instead, you do nothing from the age of 25-35 and instead save from the age of 35-65 with the same strategy. Your final balance will be $723,773,70. Your $120K turned into $720K. Not bad until you consider that that's a half-million dollar difference from the previous example of $1.2 Million! And you put in 1/3 the amount in principal and saved 3x as long!
The lesson? Save early, save often. I can't stress this enough to my young friends. I know it is hard to save money now, but in the long run, it makes a BIG difference.
2 comments:
Love compounding. I thought it was great when my 15 year old came home and said "hey, Mom, do you know about compounding interest?" I told her I did and she told me she needed to start a retirement account. So we started one. And when she's 45 she's gonna be rich!
Yeah, if you started your daughter when she was 15 she is going to be loaded by the time she retires! Good Job!
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