Saving Early Beats Saving Often

by TheFamilyCEO | More from this Blogger

03 Jul 2006 08:58 AM

Here's a little demonstration I like to bore my children with from time to time. It has to do with the importance of saving early. Here's how it goes:

Jane and John are both savers. Jane starts at age 20 and invests $1000 a year for 10 years and then stops contributing and lets her savings grow for the next 25 years. John waits to start saving at age 30 but invests $1000 a year for 25 years. Both earn the same, 6% rate of interest. Who ends up with more at the end?

Since I've already told you that this exercise demonstrates the importance of saving early, you can probably guess: Jane does. She ends up with $56,571, compared to John's ending balance of $54,865. And remember, Jane only contributed $10,000 of her own money; John had to contribute $25,000 of his.

Dramatic, isn't it? That's the value of having compound interest working for you. And had the rate of return been higher, the difference would have been even more significant.

For the younger among us who are reading this it should be incentive to take at least some of those first paychecks and put them into savings. It's so tempting to buy that first car or rent that first cool apartment and furnish it, thinking you have time to save later. The truth is that you do have lots of time to save later, but it won't be nearly as effective as if you start saving now.

But don't be discouraged if, like most of us, you are reading this and are a little (or a lot) past 20. It's not meant to bum you out; it's simply a call to take action now. Because, no matter what your age, starting today is always a better option than starting tomorrow.

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I am married and a mother of two. My interests include reading, writing, photography, and personal finance. I also love to follow politics and watch college basketball.

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