When my husband and I first married, we were poor and in debt. It was a difficult place to be, and, even as we made inroads and improved our finances, we still felt pinched. As a result, we decided that we couldn’t “afford” to set aside money for the future.
Finally, after a few years, we finally opened a Roth IRA and started setting aside some money. As I began writing about personal finance, I realized what a mistake we made. During those early years, we could have perhaps set aside $25 per month. But we thought the amount was too small. If we couldn’t “afford” to set aside at least $100 a month, we didn’t think it was worth it.
If I could go back in time, I would shake my younger self (and her younger husband), and tell them what I have since learned: The earlier you start saving, the better off you’ll be — no matter how little you set aside at first.
The Power of Compound Interest
One of the reasons that it makes sense for you to start saving as early as you can is due to the power of compound interest. This is a concept that puts your money to work for you. With compound interest, the money you earn through interest and other returns earns money. This means that more than just your original capital is working on your behalf.
As you earn interest, and that interest earns interest, your earnings are compounded — increased over time. The earlier you start saving, the longer compound interest has to work on your behalf. Just starting five years earlier can mean a difference of thousands of dollars over the course of your lifetime.
Even though we didn’t have a whole lot to set aside early on, we did have some money available. Even that small amount, compounded over time, could have made a bit of a difference. But we missed out on the extra money we could have been earning. In fact, that $25 a month, compounded monthly at 5% a year, for 35 years comes out to $28,520.65. But if we had started five years earlier, and that $25 had 40 years to grow instead? The result would have $38,309.46. That’s almost $10,000 more — just for starting five years earlier like we should have.
A Habit of Saving
Even more important than the amount that you set aside early on is the habit of saving you develop. I’m determined to teach my son this lesson. He knows that one of the first things he does with any money that he receives is to set aside some of it for savings, whether it’s money he’s earned, allowance money, or cash gifts for his birthday.
If he earns more money, he sets aside more money for savings. This habit is one that, hopefully, will follow him his whole life. A good habit of saving starts early. Even if it’s only $10 a week, the habit can stay with you. Start saving now, and then set a goal to increase the amount that you set aside. Figure out ways to boost your savings amount when you can. You’ll develop a good habit and, meanwhile, the power of compound interest is working on your behalf.