One thing all get-wealthy and financial-intelligence books will tell you is to save early and save often. I wonder if they understate the save early part.
To demonstrate, consider this example. If you save $1k/yr every year between age 20 and 30, earning 8% interest, you'll end up with $157k by age 60. On the other hand, if you save $1k/yr every year from 30-60, earning the same interest, you'll only end up with $122k.
Let me repeat that, just to emphasize how important it is. Starting ten years earlier, but only saving one-third the amount of money, you will still end up with 29% more money at age sixty. And remember that that gap will grow the farther out you want to take it.
To push this home even harder, if you up the rate of return merely to 10%, the numbers increase to $306k and $181k. This is almost a 40% gap.
It's also worth noting that a mere 2% increase in annual growth comes close to doubling the final amount, in the 10-year savings plan. This is the miracle of compound interest. Make it work for you, rather than against you (which is what happens with excessive borrowing).
One way that I've done so is that I've always put 10% of my salary away in my 401(k), even back when I had just graduated, and it seemed silly. This actually served a double (or triple) purpose. It got me started saving, and it got me used to having less cash on hand. As a side bonus, it saved me a little bit on taxes.
Some years later, I did a similar thing when I was planning on buying my first house. To get used to having less cash on hand, I split my direct deposit so a couple hundred (of every paycheck) went into an index fund while the rest went into my bank account. As a nice side effect, it helped me efficiently build up that down payment.
No comments:
Post a Comment