An Early Start Puts You Ahead
An early start can give you a real boost toward reaching your financial goals. This article explains why -- and how -- to start saving as soon as possible
Among all the financial obligations competing for a piece of your paycheck, it may seem nearly impossible to find extra money to start saving. But the key is to think of saving as another basic expense in your budget. Don't look for savings in what's left over after spending; often there isn't any. Instead, make saving a habit. Treat your savings deposits like your rent payments, and put aside a set amount each month (or even each week). Over time, even small amounts can make a difference.
In addition, the longer you are invested, the more you can potentially benefit from the power of compounding. Compounding occurs when the earnings from your investments are reinvested and produce more earnings. It's like a snowball effect; each year's gains can build on those of the past, potentially increasing the overall growth potential of your investment.
At age 25 Suzanne begins putting aside $150 per month for retirement. After 10 years she stops contributing, but leaves the money in her account for the next 30 years. Assuming an 8% average annual rate of return, by age 65, Suzanne would have amassed $276,138, which cost only $18,000 in total contributions.
On the other hand, just as Suzanne stops contributing, Henry begins. He puts aside $150 per month for the next 30 years. At age 65, he has contributed a total of $54,000, yet his account has $52,585 less than Suzanne's.1
An early start on your other savings efforts can work the same way. The earlier you begin, the less you may have to contribute to reach your goal. For example, consider opening a college savings account for each child as soon as he or she is born. By the time your child is ready to matriculate, the money will have enjoyed a full 17 years of potential growth and compounding. And that can mean less worry when tuition bills begin to arrive.
1Situations are hypothetical and do not represent performance of a particular investment. Your results will vary.
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