Years ago I worked with a woman who didn’t believe that saving money now matters. She had fabulous clothes. Designer furniture. Treated herself to dinner out most nights. And told me “I have time to save for retirement. It’s stupid not to enjoy life now when I still can. Who knows what the future brings?”
Odds are she is not alone in that thinking — and doing. But the thing she didn’t fully understand is that the longer you wait, the less chance your money has to grow faster than inflation. And the less chance you give yourself for having enough money later on — when you’ll really need it.
Why people put off saving money
Even though there is a good reason why saving money now matters, I get that there are also reasons why people feel it’s ok to wait to save. And then wait some more. Let’s look at some of what might color their thinking at the time:
- “I’m still young. I have plenty of time.”
- “I’m not making enough now to matter. I can contribute more when I earn more.”
- “Life is short. If I save, there’s no guarantee I’ll ever get to spend it.”
- “Why bother? I’ll never be able to retire anyway. I expect to work until I drop.”
Why saving money now DOES matter
So now we get to the math part. And the part where we pose the big “what if”:
What if you really do make it to retirement
and you don’t have enough money to last
for another 20-30 or more years?”
Problem is that we’re living longer and saving less. And there’s also a nasty thing called inflation that will suck up our money far faster than we think once we need to live on just what we’ve saved. Inflation can also keep our savings from growing unless we invest wisely.
Now for the math
If you invest $1,000 when you’re 25 (despite feeling like it’s too early) at an average of 3% a year, it will be worth $3262 in 40 years when you might want to retire. If you wait until you’re 45 to start, it will be worth only $1,806 at age 65.
That’s a huge difference. And it really does add up as the years go on. And if you add more regularly. That’s why saving money now matters. Just imagine how much investing even larger amounts of money (wisely) in the earlier years will get you!
And there’s a secret magical math property that makes it even better. It’s called compounding. What that does for you is take the interest you’re earning, add it to your current base amount, and then pay interest on both parts.
So, if you don’t withdraw any if the money and let it keep working for you — including the interest — you’re getting interest on interest as well as on the original (principal) amount. And that’s why the math over many years can help build you a very nice-sized nest egg.
So if you start late in the game, your smallish egg doesn’t have time to grow as much as it could. And, unless you’ve done the math very carefully — with the help of a crystal ball — your retirement needs will be much larger than you ever imagined. And for that, you’ll need a much larger egg.
What about that woman I worked with?
If you’re wondering … she was unhappily surprised when retirement seemed to sneak up on her — far sooner than she somehow led herself to believe. And much sooner than her savings were prepared for. Although she had been looking forward to a life of leisure, she’s still working.
More posts to help
⇒ EXTRA: You Deserve More!