You may be thinking that living your life and hanging with friends is more important than saving for retirement; and if you put off investing for a while, it will make no difference.
The earlier you start saving for your future and your eventual retirement, the more time your investments will have to compound and the more money you will have. Remember when you learned about compound interest? Compound interest is interest paid on the initial deposit and also on the interest as it builds over the years.
Look at this example of how your money can grow over 40 years, then answer the question below.
Three people invested $5,000 per year. Ella and Kahlil started at age 25. Ella stopped at age 35 while Kahlil continued the $5,000 investment until he reached 65. Josh started at age 35 and continued through age 65. All of them received the same rate of return. Who ended up better financially?
- Ella invested $5,000 per year from age 25 to 35 (10 years); $50,000 total investment with a return of $602,070 at age 65.
- Josh invested $5,000 per year from age 35 to 65 (30 years). $150,000 total investment with a return of $540,741 at age 65.
- Kahlil invested $5,000 per year from age 25 to 65 (40 years). $200,000 total investment with a return of $1,142,811 at age 65.
Question
Why does Ella who saved the least amount and only for 10 years have more wealth than Josh who saved for 30 years?
Ella started early which allowed her money to compound for 40 years. Josh's money only compounded for 30 years. The earlier you start the longer you have for your money to increase in value by adding more interest.
