Would you pay $14,000 over the next six years so you could have $930,000 at retirement age? This seems like a simple enough question to answer, but the reality is few people will. This past week I have been studying the time value of money and it has been grueling learning the mathematical equations to solve the various questions related to these concepts but there is a huge lesson to be learned here. The earlier you begin saving money, the less you will have to save to reach a larger total.
The following analogy will help illustrate this point. Assume that you had two nephews that used all of their money from birthdays, holidays, and chores and they both decided to save their money. The first nephew (Nephew A) began saving at the age of eight and he decided to save for only six years, stopping at age 13. The other Nephew waits until age 18 to begin saving and he saves for only five years. Neither nephew ever saves a dime again and lets the money grow until age 65. Both assume a 9% return on investment over the life of the investment.
Nephew A Age 8 Nephew B Age 18
Year 1 500 Year 1 2000
Year 2 750 Year 2 2000
Year 3 1000 Year 3 2000
Year 4 1250 Year 4 2000
Year 5 1500 Year 5 2000
Year 6 1750
Total Invested $6,750 Total Invested $10,000
Nephew A would have a total of $1,266,170 and would have only invested $6,750 while nephew B would have a total of $1,174,600 and would have invested a total of $10,000. Nephew A is clearly the wiser of the two investing nearly four thousand dollars less and having nearly $100,000 more saved at retirement. This illustration goes to show how beginning your savings early can make a huge difference in the long haul. Now if this is the case why wouldn’t we begin saving for ourselves and our children as early as possible. (Usually because we are figuring out how to get out of debt and we don’t have the money to spare initially) Also, why wouldn’t our government initiate the investment and simply set us up on a loan repayment of sorts to repay them for the initial investment of $6750? I would even pay $10,000 during my first six or seven years earning an income (18-24) for the opportunity to receive 1.2 million at retirement age. Am I crazy or does this make more sense than contributing to a broken system with little to no hope for a future distribution.
Filed under: Personal Finance Links
