There is one fact in life; no one is getting out alive! Yep, everyone dies it’s a fact of life we are living longer which is fantastic, but everyone will meet their maker one day nonetheless. That is why the most valuable asset of all is TIME. This is not to be taken lightly as no one has any guarantees, although this article is focusing on the TIME VALUE OF MONEY, it is important to foster friendships, be there for family, and seize every day we can.
All these things are more important than the saving of money, but the saving of money will compound over time to help make sure you can focus on all that is important to you in life. The true test in life is to find the right balance of working hard and making sure you are enjoying life along the way! For this article, we will look into how amazing compound interest truly is. I will be using screenshots from the money chimp compound interest calculator that you can play with here.
What is compound interest? In simple terms, compound interest is when you take the earnings you have made off of an investment and then reinvest this money allowing it to compound. This means the next time you receive income from your investment it is not just on the starting principal amount you invested, but the income previously reinvested as well. This allows the money to grow exponentially without doing any more work as long as you do not withdrawal your investment.
In other words, you plant a seed now (your principal) and then it allows your tree to grow and continue to grow over the years without any more work. If you add additional funds to your initial investment account (water your tree) it will grow faster. Remember that growth takes time so some years you may have a storm or a drought and it could set you back or slow down the growth of your tree. For the most part, however, you will see years with modest gains and others with excellent gains and your tree will grow large. The key is to plant many trees and then one day wake up to a shady tree and plenty of fruit!
Now for the fun part let’s go over some examples to show how even small amounts add up over the long run. The compound interest rate at which this money will grow can be debated all day. For simplicity in this exercise, we will always use 7% which I believe is a realistic long-term rate of return for many risk asset types.
First, let’s look at a 25 year old who can afford to find $5,500 a year to invest and decides to commit to this plan for their entire working life. This amount is also the amount needed to max out an IRA. They will be investing from 25 to 65 or over a long period of 40 years.
Pretty amazing what time has to offer, if you are willing to stick to a plan and be a lifelong saver at the traditional retirement age you will have over a cool million, not too shabby. What if you decide to wait until you are 35 and start the same strategy?
Waiting ten years you had to take a pretty big penalty flag, not a small holding call no we are talking march back down half the field and it’s going to cost you half a million dollars. Making these dollars does not come easy because you have to give up your most valuable asset to receive them time. The only difference between the two examples is one person gets half the reward the other does because they waited ten years to start.
That example is powerful to show that it is always important to be saving at some level. Life has its ups and downs, but if you can start today to save and be a lifelong saver, you will come out way ahead. Now let’s take a look at someone who is not interested in working a full-time job all the way to the traditional retirement age of 65.
Let’s do this from the perspective of a single income earner who starts working at 25. They went to college for a degree that had a good entry level salary, and they decide to not overspend early but instead continue living a college lifestyle. They are so into saving that they make the commitment to max out their 401(k) at work and their IRA for a total of $23,500 we will round up because their employer has a modest match to $25,000. Over time this persons income will grow, which allows them to splurge on things here and there to get out of that college lifestyle, but they still commit to save and work in the corporate world for a decade or until they are 35.
Nice $370,00 by 35 that is amazing now you can start doing things you care about. Seriously stop stressing so much you worked for ten years and stayed committed to saving and it has paid off. You will have a huge surplus in retirement compared to the average American if you just do this and leave the money to grow never contributing another dollar.
Or another way to look at it is you no longer need a demanding job to ensure you are taken care of for life. Instead, you can use the skills and resume you have created over a decade and do something you care about or something that is less stressful because you don’t need the money. Let’s not get this confused with being financially independent (no longer a need to work). You still have to have some sort of income, but the needs for the income are only as strenuous as the lifestyle you desire. If you like the life of luxury, then you have to keep working but if you are willing to slow down and focus on the things that matter you can make more than you need in a number of occupations when there is no longer a need to save. Take a look below would $2.8 million be enough to live a comfortable retirement? If you are willing to make the sacrifice up front you can let your money work for you and end up a millionaire.
The power of time is fantastic, and it is something that is often forgotten in our younger years. Do not be discouraged if you have started late just start now! This goes for not just the money in your life but your relationships as well. Invest in these things now and continue to invest and the returns you see will most likely surprise you.
What Are Your Thoughts?
- Is compound interest worth saving early in your life?
- Do you value your time?
- If you could go back to any age what would it be?