Sunday 24 December 2017

Lesson on the Gift of Compounding: Save Young and Be Rich Sooner

Interest Compounding has a wonderful effect on our savings. When you start young and let compounding work its magic, achieving your retirement goal is very easy. This is why many financial bloggers including, yours truly, espouse on the importance of starting to save in the early stages of working life.

Using Mathematics

Regular readers of this blog will know of my penchant of relying on boring Mathematics to convince, so here comes the maths :)

Two individuals, Alan and John, enters the workforce at 25. 

Knowing the effects of compounding by saving when young, Alan decides to set aside $10,000 yearly from age 25 to 60. John, on the other hand, being a millennial with a YOLO life, only realizes during his mid-career the need to plan for retirement. John immediately starts to set aside $20,000 yearly from age 40 to 60. Both Alan and John invests in the same investment which yields a 5% return per year. Instead of copying and pasting an entire Excel Worksheet, let me spare readers the agony. 

At age 60, Alan would have a retirement saving of $1,006,281 while John would have a retirement saving of $750,104.

To summarize, while Alan saved half the quantum of John's, the fact that Alan had started 15 years earlier than John, places Alan on a better retirement footing financially.

The Story of the Tortoise and the Hare

During our school days, we have been taught of the idiom "slow and steady wins the race", financial freedom is exactly like this. Be the tortoise who starts the race early and run slowly; Not the hare who slept at the start and had to run doubly hard because he had fallen too far behind. 

No comments:

Post a Comment