We have all heard the saying, it is never too late to start planning or saving for retirement. What about too early? There is no such thing as too early. You parent could put a once off lump sum into investments when you are born, intended for your retirement. Not too early. You can start in your 20s, again, not too early even though the last thing you want to think of is retiring when you are fresh and early starting off your career. Maybe you are in your 50s? If you start saving now, you will still be left with more at retirement than if you didn’t save anything. If you start earlier, you will get rich!
It is never too early to plan for retirement. TIME is your biggest asset and your greatest ally.
No matter what your age, now is the time to begin saving for retirement. The biggest investment mistake is to not start as early as you can.
Save, save, save!
Spend less than you earn and save and invest the difference. This is the best way the attain wealth. Most rich people got there slowly by saving.
“I have resigned myself to the fact that I would never be a millionaire.” Pretty much an exact quote I said when I was leaving university because I genuinely believed that. I started reading several personal finance blogs and even got into a few investing books. Each of them had a common conclusion, high income does not lead to wealth, as people tend to have lifestyle inflation, but saving does lead to wealth. A high income certainly helps if you can save most of it.
Spend less than you earn and invest the difference!
Saving is the path to wealth which you have to walk one step at a time. Only time will allow you reach the end of the road. Very few people get rich fast and there are thousands of get rich schemes trying to prey on people looking for a get out of jail free card. The only tried and tested method to wealth is the slow and steady path. Increase the gap between earnings and spending, you will reach your goal faster, but if you invest the savings, the power of compounding comes into effect and works together with the time you are putting in to grow your wealth enormously.
Compounding is key!
The smallest sum of money can grow to a large amount over time. Investing is a powerful tool, but starting earlier is even more important than having a large sum to invest. People are scared if investing but The Four Pillars of Investing will reassure you that the market will always recover from a crash as it has done time and time again.
Compound interest is the back bone to getting rich slowly.
I am 28. Unfortunately, I have missed 4 years of compounding as I started full time work at 24. I will never get those 4 years back, but I am in a fortunate position of only being 28 when I realised I need to plan for the future, financially.
Let have a look at a hypothetical scenario, one that actually happens every day.
Mark and Jacob both turn 25 on the same day and start full time work on the same day.
Mark decides to start saving and investing these savings in a low cost mutual fund. He starts saving €500/month, or €6,000 a year, for 20 years. All this month is put into a low cost S&P 500 tracker, and compounds over 20 years at the historical average of 7%. He stops saving after 20 years, on the day of his 45th birthday, but leaves the money in his investment account to continue to compound.
At the exact same time, on their 45th birthday, Jacob decides to start saving. He follows the exact same savings policy as Mark did over the next 20 years, that is €500/month into a low cost S&P 500 tracker for 20 years.
They both retire on their 65th birthday, assuming no other savings, extra income, etc. What are the final retirement savings for Mark and Jacob?
Remember…. compound interest is the back bone to getting rich slowly.
Mark has €982,002 and Jacob has €253,768 on their 65th birthday. Both men contributed €120,000 over their lifetime, the only difference is that Mark had 40 years of compounding on his side, compared to Jacob’s 20 years. Now, Mark has nearly 4 times the amount that Jacob does, without any extra work or effort.
I certainly know which of those scenarios I would rather be in. I am 28, so I am 3 years behind Mark. If you are in you 20s, start saving for retirement now. It will stand to you in time. I might take a little more effort to save earlier, but €500 shouldn’t break the bank. Even if you can’t save €500, save the maximum you can. Your main ally is time and compounding interest. If you are older (maybe in your 40s), still save and still invest. Some compound interest is better than no compounding.
A small sum of money can grow to be quite substantial when left to compound.
You have a lovely new born child and on the amazing day they were born, you invest €1,000 for their future. €1,000 is a very manageable amount to save up, but what does that turn into by the time your baby reaches 65 years old?
Maybe a more realistic example. You are 20 years old, you save up €5,000 with all the summer jobs you worked since you were 16 years old. At 20, you have 45 years of compounding until retirement age so you actually end up with €105,012. That is more than 21 times the starting amount without any extra effort on your part.
That same investment of €5,000 invested at 40 instead of 20 winds up as €27,137.
Now you see the power of compounding when coupled with enough time.
That 20 year old says, I am going to wait another year before I invest. Whatever the reason, it has a huge effect down the line. €5,000 invested at 20 ends up at €105,012. If you invest at 21 instead, it becomes €98,142. By waiting 1 year, you are missing out on an extra €6,870.
This is even more pronounced if you look at Mark. If he started 1 year later he would miss out on €86,629. I can get over missing out on €6,870 but there is no way I can be OK with not having an extra 80 grand in the account.
- Start early
- Spend less than you earn
- Save and invest the rest
- Get rich slowly
I am Steve, the author and owner of Fire-ish, where I try to share my story and help people towards Financial Independence with small tips and tricks that add up. Follow me on Twitter at @fire_ish and on Pinterest. I am trying to grow my readership so if you enjoyed this post, please share it!