The Power of Compounding

“I’ve spent all my money on food and booze!”

“I can’t not go out on Saturday with all my friends…”

As a fellow millennial, I get it – saving money isn’t a sexy reason to stay in on the weekend. Between your wanderlust attitude, that new rooftop bar your friend keeps raving about and your social media feed making it feel like you’re not doing enough with the few hours you have to yourself every day, your fear of missing out (FOMO) is chipping away at what you could be saving for emergencies and eventually a comfortable retirement. But as a post grad, or maybe someone in your early 30’s – why should you be thinking about retirement now? Isn’t that something your parents should be worrying about?

Because NOW is when the numbers are in your favor.

By using compound interest (a factor Einstein considered to be the 8th wonder of the world) and saving early in your career, you’ll reap significant rewards later in life. You know that same interest you pay on your student loans, car loan or that emergency credit card? Now you get to earn it, by letting your money make money.

Here’s an example. Say you just started a new job on your career path and you’re working on a budget. After accounting for rent, student loan payments, groceries, additional necessities, you decide that you can squeeze out $500 a month from your paycheck to put away and invest. By saving $500 every month over a 40-year career and earning a growth rate of 6% per year over that time, you could end up with nearly $1,000,000 by the time you retire! (For reference, a benchmark for the broader economy, the S&P 500, returned 7.8% annualized over the last 40 years*). Is $500 a month stretching it? Even $250 a month could yield nearly half a million dollars by the time you retire. And remember, this is the budget you’re creating as an entry/low level employee and doesn’t include any possible company matching or pay increases you’ll receive in the future. With each promotion and raise, you can pad that nest egg a little more.

And why is starting now so important? Going back to the example above, what happens if you waited just 10 years and started saving $500 a month over the final 30 years of your career instead of all 40? Earning 6%, those funds would amount to only $502,000 at the end of 30 years – almost a 50% reduction! Those early years of saving and compounding are vital to the growth of a long term portfolio. Starting now will reap financial rewards throughout your future.

So I’ve sold you on the idea of saving. Now where to begin?

Next month I’ll be outlining the most common types of accounts to use and which might work best for you. Stay tuned.

*https://dqydj.com/sp-500-return-calculator/

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2019-11-05T19:51:41+00:00

About the Author:

Eric Thompson is a Director, Wealth Advisor at Round Table Wealth Management. Read Eric's Biography >