One of the challenges of saving for retirement is getting people to understand the huge role that time plays in building a nest egg. It’s not just about saving. The sooner you start, the more time your money has to grow and compound.
Building a nest egg that can grow over time is a simple idea. That doesn’t mean it’s easy, especially when you are young and just starting to establish yourself. Most people are not born into wealth or financial well-being and once their education is completed, they will face financial challenges immediately. Entry level jobs will open doors to opportunity down the road but usually don’t pay well. But if you are disciplined with your money you can make it happen. However, you must start saving so that the “time value” of money will work for you.
Consider what Albert Einstein said about compound interest. He called it the “eight wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” Strictly speaking compound interest works because the interest earned on savings is added back to the principle. In that way interest is then being earned on an even higher amount…year after year. The real magic can be seen as you near retirement when your small initial investment has had time to grow for decades.
Here’s an example. If you are 20 years old, invest $1,200 initially, and contribute $100 per month to your investment at 5% interest compounded yearly for 40 years the value of your savings would be $153,400. If you waited until you were 30 years old to start investing at the same rate, your savings would be just $84,900. That could make a huge difference when you retire.
Of course, when you start young you can invest in products with the potential for higher returns because should they not produce the way you expect, you still have many more years to grow your savings. You should also be earning more in your career and therefore be able to contribute more.
So, let the “time value” of money work for you. If your employer offers a 401k, invest enough to maximize the employer contribution. If not, create an automatic deduction to be sent to a savings account and start an IRA.