Nate, Ashley, and Sohn are all concerned about having some cash in the future. They each have a different approach as to how to save. The one thing that is constant is that they can each earn 8% on their contributions until age 65. Nate is working during high school and wants to save $5,000 per year, every year, starting at age 15 and making his last contribution at age 21. Nate doesn’t think he’ll need to save after that.
Ashley thinks she has the better approach. Ashley wants to save $5,000 per year starting in college at age 21 and save $5,000 per year, every year, until age 30. At that point, she thinks she can stop and not save any money after that.
Sohn wants to enjoy life and doesn’t want to start saving until age 30. Sohn plans to save $5,000 per year starting at age 30 and saving that amount every year through age 65. Sohn feels this will be the best way to approach saving for the future.
So, who has the most at age 65? Nate only put away a total of $35,000 of his own money. Ashley did better and put away a tidy sum of $50,000. Sohn managed to put away a whopping $180,000 by age 65. Have you figured out who has the most at age 65? It’s Nate.
Wait, what? Yes. Even though Nate only put away $35,000, with the miracle of compound interest his total contributions had more time to grow at our hypothetical 8% rate. This is the miracle of compound interest and the time value of money. Nate ended up with just over $1,424,000 at age 65. Ashley and Sohn did alright as well, but they didn’t earn as much as Nate due to not being invested as long. Ashley ended up with just over $1,156,600 and Sohn ended up with just over $1,010,300 (figures have been rounded down).
All three were smart to save, and smart to stick to their savings plan. Nate however, started the earliest, contributed the least, and wound up in the lead at age 65. Nate also contributed less of his lifetime earnings so he ended up with a nice savings balance and the use of his money during his life. Ashley was a close second. However, Sohn had to contribute a very sizeable amount to his savings during his working years.
The moral is to start saving and investing as early as possible. This example assumes a set amount of $5,000 per year and a hypothetical 8% growth rate. Your goal may be different. You may be able to save more, or less, and your growth rate could be very different. Remember, the return is hypothetical for illustrative purposes only and is not a guarantee of any future performance. You should work with a financial planner to set personal goals.
As an independent Certified Financial Planner™, I can help you plan your savings and refine your goals.You may not have fifty years to save, but don’t delay, start today! Contact me and let’s get started on a savings plan. #talktometuesday #education #Hireaplanner #stressfree #savings #saveamillion #startearly