Saving Early & Letting Time Work for You
The earlier you start pursuing financial goals, the better your outcome may be
AS A YOUNG INVESTOR, YOU HAVE A POWERFUL ALLY ON YOUR SIDE: TIME. When you start investing or saving early in your twenties or thirties for retirement, you can put the time to work for you.
THE EFFECT OF COMPOUNDING IS HUGE. Many people underestimate the power of time, so it’s worth illustrating. Let’s take a look at using a hypothetical 5% rate of return.
HOW DOES IT WORK? A simplified example goes like this, using $100 and the aforementioned hypothetical 5% rate of return. After a year, you earn 5% interest, or $5. Another year, another 5%, which adds $5.25 this time. In the third year, your 5% interest earned amounts to $5.51, bringing your balance to $115.76. The more money you deposit, the more than 5% returns. So, if you were to deposit $100 every month into that same account, you’d make a hypothetical $836.63 in compound interest from $6,100 in deposits over five years. That compounding continues, even if you stop making deposits. All you really need to do is let that money stay put.¹
THE EARLIER YOU START, THE GREATER THE COMPOUNDING POTENTIAL. If you start saving and investing for retirement in your twenties, you may gain an advantage over someone who waits to save and invest until his or her thirties.
EVEN IF YOU START EARLY AND THEN STOP, YOU MAY OUT-SAVE THOSE WHO BEGIN LATER. What if you contribute $5,000 to a retirement account yearly starting at age 25 and then stop at age 35 – with no new money going into the account for the next 30 years. That’s hardly ideal. Yet, should it happen, you still might come out ahead of someone who begins saving for retirement later.
ARE YOU WARY OF INVESTING? If you were born in the late 1980s to early 1990s, you’re old enough to remember the market volatility in the early 2000s and the credit crisis of 2007-09. Recent events, in the wake of the coronavirus, might bring back memories of that time.
All this may have given you a negative view of equities, shaped during your formative years. These events are clear examples of how risk plays a part in this type of investment.
The reality, though, is that many people preparing for retirement need to build wealth in a way that has the potential to outpace inflation. You will retire on the compounded earnings those invested assets are positioned to achieve.
CONTACT
If you have any questions or comments about this retirement planning article or the Retirement Plan Advisors, please contact Matthew Martin, CFP, Certified Financial Planner:
- Phone: 248.767.3828
- Email: mmartin@retirementplanadvisors.com
CITATIONS
1 – thebalance.com/compound-interest-4061154 [12/6/19]
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting, or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax, or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
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