Why it’s important to start saving early
By: Matthew Nemer
Tags: Retirement, Money, Personal Finance, Interest Rates, Saving Money

Why it’s important to start saving early

“Catching up” on savings is easier said than done.

Saving less earlier can be more impactful on your retirement than saving more later.

Understanding the power of compounding interest can help you prioritize spending versus saving.

Most people procrastinate. This is generally for good reasons, as delayed responsibility rarely incurs consequences. Putting off cleaning the house, working out, or asking someone out on a date may lower your expectations, but has little impact on future outcomes. Saving is one aspect of adult life that, when ignored, can have a profound impact on your future outcome.

Most people who put off saving do so, not because they are lazy, but because they are optimistic. This is the familiar trap of the “I’ll catch up when I earn more” fallacy. Even if you’re confident that you’re going to strike it rich, you may find you saved too little too late. When Warren Buffet, the fourth richest person in the world, was asked why no one invested like him, he responded that “it’s pretty easy to get well-to-do slowly, but it’s not easy to get rich quick.” The majority of us have a low probability of becoming rich overnight, but we all have access to the power of compounding interest — the mathematical force that Einstein referred to as the 8th Wonder of the World.

The amount of money you will have saved at retirement is a function of three variables: how much you saved, your return (or interest rate), and how long you save. Saving longer is often better than saving more later. Consider the following scenarios [Example 1], both returning 5% annually. Mary saves early. She withholds $5,000 per year between the ages of 25 and 35 — saving for 10 years, total. Dan is certain he can catch up in the future. He begins saving $5,000 a year at 35 and continues until he’s 55 — saving for 20 years, total. After 45 years, Mary has invested $50,000 and retired at 65 with $285,394. Dan invested $100,000 and retired at 65 with $282,770.

Example 1

Notice that Dan had to save twice as much money over twice as long to match the value of Mary’s savings at 65. Mary’s savings didn’t grow faster — remember they both earned 5% per year ­– she just allowed her savings to compound for longer. To demonstrate this difference further, consider a scenario where you save $5,000 per year for 40 years and earn a 5% return per year [Example 2]. If we compare the value of the $50,000 we saved in the first 10 years to what we saved in the last 10 years, it becomes clear that “catching up” is not as easy as replacing dollar for dollar.

Example 2

If Dan and Mary were to save $5,000 per year over their entire professional life, they would have saved over $630,000. Money contributed earlier compounds the longest and appreciates greater in value than money saved later. The earlier you save, the more compounding you will experience.

Everyone’s situation is different. You may be struggling to save because you’ve chosen to pay down debt. Saving early may require sacrifices, but can yield powerful results. The best savings strategies start with realistic expectations that can be executed consistently. Pick a target that is right for you and remember to focus on long-term gains. A dollar saved today is worth more than a dollar saved tomorrow.

Disclaimer: This article is for informational purposes only and is not a substitute for professional financial advice. Opinions, tips, advice, or other information in this post do not necessarily reflect those of Linus.

To learn more about how Linus can help you maximize your return on your savings, visit www.getlinus.io.

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