Most of us, working adults, save. We save for various reasons, such as for the inevitable rainy days or for our children’s education. One major reason for our savings is for our retirement funds. In personal finance, it’s important to save early as young as possible and adequately for our desired retirement lifestyle. I shall explain the rationale for the save early, save adequately mantra.
Suppose we assume that we save $10,000 at the start of every year and we invest all of our savings in equities, earning a return of 7% annualized. If we were to start at the age of 25 for 10 years and then make no outlay afterwards, we would amass a total sum of $1.13 million at the age of 65. Wow! Not bad for a base of only $100,000.
Now, let’s suppose that we lax a little and start at the age of 35 and save $10,000 every year for the next 30 years till 65. What do we get? The second case would earn us a total of $1.01 million. As you can see, the amount is lesser even though we save 3 times the amount ($300,000). It is thus important for us to save early and net the power of compounding.
Remember the adage of the magic of compounding when you’ve the urge to buy your next iPhone or Honda Civic.