This is a good point to introduce the concept of the Time Value of Money to get ready for Investing. What does this mean? Simply stated, the longer money is invested, the larger it will grow because of the time involved and the compounding of interest. What this means to you is the more money you can put into investments (especially tax deferred retirement investments such as a 401K) and the earlier you put it in, the more you will have when you retire. It doesn’t take much.
As an example of the time value of money, if you started at age 20 and put $20 a week into a retirement account that invested in mutual funds, using a very conservative return of 6% per year, you would have accumulated, by the time you were age 65, about $190,000 in a tax deferred account or about $146,000 if you were paying taxes on the gains. And that’s on just a $20 per week investment. Imagine if you could free up $50 a week to invest. Well just so you don’t have to wonder, the totals would be about $478,000 tax deferred and $365,000 if taxes were paid.
Here’s one more example, just because I know that most people looking at this are not 20 years old. If you did the same $50 per week investment starting at various ages, your results would be:
I think you can see from this example that it is in your best interest to start putting money away for your retirement as soon as possible. Don’t be concerned with the amount and don’t wait until you can put $100 a week or $500 a month. Start now with what you can afford, even if its $5 a week. Increase the amount later as you can afford it (but not too much later).
Another way to look at it is this fact.
If you put just $5 a day in an investment plan paying 6% per year, after forty years you would have over $300,000, including the $73,000 that you put in. Imagine if you were in a position to put $50 a day away at 6%, you would have over $3 million dollars. I know most people at the age of 20 can’t put $50 a day into investments but this just points out that the more you can put away, the better off you will be in the future.