3 Reasons to Start Saving Early
Why you should begin saving and investing from an early age
When it comes to saving and investing one of the biggest advantages that you can have is 'TIMEâ€. In my opinion time is the single most important factor in determining the ultimate size of your savings and investments. To maximize this advantage, you need to start saving and investing as soon as possible. The earlier you start, the larger that advantage will be. The idea is to maximize the amount of time your investments have to compound. The earlier you develop good financial discipline, the better off financially you will be throughout the rest of your life.
I am sure that most everyone has heard the phrase "it's not rocket science". Well, that's true about saving and investing. It's not rocket science! I believe anyone with a little practice and dedication can become a disciplined saver and investor. I know this is something you can do, you just have to adjust your mindset and spending habits.
I know when you are young saving for retirement isn't exactly the most important thing on your mind as it seems so far in the future. I know this because it was true for me. When I was young I never gave saving and investing a thought. I just lived day to day and wasted all of the money I earned. I also know that this is not one of the most interesting subjects, but I would argue it is one of the most important lessons you can learn in your lifetime. If you can learn to be disciplined and save a portion of your earnings along with proper debt management from an early age, financially, you will be far ahead of most other people.
A recent survey by Bankrate.com (2016) found that most Americans have financial regrets. When asked to pick their biggest financial regret from a list of possibilities, the most popular choice (18%) was 'not saving for retirement early enough.'. Those in or near retirement were much more likely to regret a late start than younger Americans. The second most popular was 'not saving enough for emergencies.â€ According to a Bankrate.com survey released last year, 62% of Americans have no emergency fund. If you have not already started saving, please start today.
The following hypothetical example illustrates the importance of saving and investing from an early age; it also illustrates the power of compounding;
We have two investors, Sally, and Bob.
Our first investor, Sally, is wise and decides at the age of 25 that she needs to start saving for her retirement, so she starts investing $300 per month into a diversified all-world index fund. She continues to invest the same amount each month until the age of 65.
Over the 40 years she has invested a total of $144,000, and the value of her fund is $770,000 (this assumes an average annual return of 6.9% over the 40 years).
Our other investor, Bob, like a lot of people, didn't start thinking about his retirement until he was 40, when he realized time was flying by and he had nothing saved for his retirement.
So at the age of 40 Bob decides to start investing in the same diversified all-world index fund as Sally did. Bob knows he is way behind so he decides to invest $750 per month into the fund and also continues until the age of 65.
Over the 25 years, Bob has invested a total of $225,000 and the value of his fund is $598,025.
Sally, who started investing, early invested $81,000 less than Bob, but ended up with $171,975 more in her retirement fund when they both reached the age of 65.
This result is with Sally starting at age 25. If she had started at 18 or 20 her results would have been even more impressive.
I will keep repeating this over and over; the earlier you start saving and investing the better off you will be financially later in life.
Here is another hypothetical example: Say you contributed $5000 per year to a 401K for ten years â€“ assume your investment earned 8 percent a year, and you reinvested all of the investment earnings back into your account. Look at the difference it makes when you start investing at an early age. You would see wildly different amounts at age 65 when you retire.
If you started saving at age 25 and stopped at 35, when you retire at 65 your $50,000 investment would have grown to $787,000.
If you waited to start saving until age 35 and stopped at 45, when you retire at 65 your $50,000 investment would have grown to $364,000.
If you waited to start saving until age 45 and stopped at 55, when you retire at 65 your $50,000 investment would have grown to only $170,000.
If you waited to start saving until age 55 and stopped at 65 when you retire your $50,000 investment would have grown to only $78,000.
These examples assume that you only invest $5000 a year for ten years and then stop. If you were to contribute that amount from the age of 25 until you retire at 65 your account would be worth more than 1.35 million dollars.
These estimates do not even factor in employer-matching contributions, which would make your account grow even larger and faster. All of these examples show how important it is to start saving and investing from an early age.
I know that when you first start saving it can be very boring. It may seem like it takes forever for your savings balance to grow, but through a combination of disciplined saving along with investing a portion of your savings as time passes you will see your balance increase exponentially which can be very exciting.
The best way to ensure that you reach financial independence is to spend less than you bring in (live beneath your means) and save the difference. I know that seems like a simple concept, but it is not always easy to do. However with practice and dedication, it can be done, and that doesn't mean you have to make huge sacrifices. You just need to be very mindful of what you are spending your money on and adjust your spending habits accordingly.
Studies have shown that many wealthy people are not rich because they make an enormous amount of money. It is because they spend less than they make and they save and invest the difference. There are numerous examples of people who have had large incomes or have won huge amounts of money only to end up in financial ruin because they spent more every year than their income brought in.
What we are talking about here is something very important; we are talking about your financial security. Besides ensuring a financially secure retirement, if you start saving at an early age you can achieve financial freedom at a relatively early age. You will be free to make lifestyle choices which you never will be able to make if you are living paycheck to paycheck.
If you start early you will put yourself in a position where if you choose to you can retire at a very early age while still in good health. Another benefit will be the reduction of stress that you can experience from having financial problems.
An important part of the puzzle is also to invest a portion of your savings, which can easily be done if your employer offers a 401K program. Many employers also offer company matching contributions, which put very simply means that your employer contributes a certain amount to your 401K based on the amount that you contribute. If you are young I would recommend that you contribute the maximum allowable into your 401K. This will not only allow it to grow quicker, but will also maximize the employer matching contributions. The employer matching contribution is free money that is offered to you and simply must be taken advantage of.
If your employer does not offer a 401K program you can still invest on your own with an IRA or a Roth IRA. If you are the type that likes to be more in control of your investments you could open a brokerage account and invest in a variety of ETF's or mutual funds. If you are interested in managing your own investments the first step I would recommend would be to educate yourself about all of the investment options that are available to you. The more you can educate yourself the better. Just opening a brokerage account and blindly investing your hard earned money without knowing what you are doing can be financially devastating.
To reap the most benefit from your investments, the sooner you start the better off you will be. An investor's age also influences the amount of risk he or she can withstand. Young people who have years of earning ahead of them can afford to take on more risk in their investment activities. If you are young, you can build a more aggressive portfolio that will be subject to more volatility, but that stands to produce larger gains. Young investors can withstand the increased risk in their investing because they have the time needed to recover from any losses or investing mistakes they may make.
When you start investing at an early age you also have the time needed to learn from both successes and failures. Because investing has a fairly lengthy learning curve, young investors are at an advantage because they have years to study the markets and refine their investing strategies.
On the other hand, most individuals nearing retirement age will gravitate towards low-risk or risk-free investments, such as bonds and certificates of deposit (CDs) because they do not have the benefit of time to recover from setbacks. Also their expected returns on their investments will be smaller.
So now the big question you must ask yourself is what kind of financial future do you want?
Will you live paycheck to paycheck for the rest of your life? Will you allow debt and wasted spending to control your quality of life? What kind of retirement will you have? Will you be forced to work well into your old age (if you can even find a job) because social security will not be enough to cover your basic needs?
Will you have a comfortable, secure financial future? Will you have a future where you will have achieved a measure of financial freedom? Will you have a future where you are free to make lifestyle choices as you wish and not because you are forced to due to debt or lack of savings? Will you have a future where in retirement you can choose to work because you want to, not because you have to?
There are some people who like to stay busy and enjoy working while others would rather travel and relax. If you start planning now for your financial future, you will be free to make that choice for yourself. I know you can do this! As I've said before, it's not rocket science. You just have to make the commitment to spend less than you bring in and to save the difference.
All you need to do is make the decision to start today. As I have said before, I believe it is one of the most important decisions you will make in your lifetime. It is a decision that will have a major impact on your life either positively if you choose the path of financial discipline or negatively if you instead choose to be financially reckless.
The sooner you start saving, the better off you will be financially the rest of your life. I can never repeat that enough. Ideally, you will start saving for retirement as soon as you begin your working life.
Also, the sooner you start, the longer you will have to let compounding work in your favor. If you can do this and stick with it throughout your lifetime, financially you will be far ahead of most people. You just have to start!
If you could only remember three things from this book, I would want you to remember the following;
Save as aggressively as you can, as early as you can.Spend your money cautiously.Allow your investments to compound as long as possible.Written by Donald Hancock ~ Real Life Trader
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