It sounds counterintuitive; how can a person who *stops* saving at 30 wind up with more in the bank than someone who diligently saves their pennies up to age 65?
It’s not magic – it’s maths. Specifically, the seemingly magic effect of compound interest. If it’s true that you should work smarter and not harder, then this is the financial equivalent.
How does this work in real life?
Sam is 21 years old. He decides to start saving and investing $2,000/year until he turns 30 years old. Then, he stops and contributes nothing further. Let’s assume he receives an average return of 8% per annum, which is reinvested.
Zoe is also 21 years old. However, she decides not to start saving until she turns 31. She then begins to save and invest $2,000/year every year from the age of 31. She also achieves an average return of 8% per annum, which is reinvested.
Zoe has put away a lot more money than Sam for many more years, so it would be natural to assume that her savings would be much higher at age 65 than Sam’s. Right?
Sam’s 10-year $20,000 investment plan will yield $428,378 by the time he reaches 65.
Zoe, who invested a total of $70,000 over 35 years (three times as much as Sam!), will yield considerably less – only $344,634.
The key is starting to save sooner, rather than later.
It may seem like a tough ask to start saving for retirement when it’s so far away, but realistically you are more likely to have spare cashflow in your 20s than in your 30s, when many people’s financial commitments increase; particularly if you buy a house or have children.
Although we can’t help you wind the clock back, the key lesson here is that it’s never too late to start, and the sooner the better! If it’s any consolation, you can always explain this paradox to your kids or grandkids – they may just thank you for it one day!
If you’d like more information on cash flow or investing, please contact us.