Saving Early: The Power of Compounding

One of the most important things I've learned in Finance and Accounting over the last few years is to start saving money early. The power of compounding interest is massive over many years, so saving early is a must to accumulate wealth. To demonstrate, I will be using an example with Rob and Tom.

Rob: Rob is a university student and loves to party. He goes out every night partying at the bars or a local bubble tea joint. He also likes expensive things and buys only brand name clothing. He doesn't save a single penny until he turns 25 and realizes that he should start saving for a house or retirement. Starting at age 25, he saves $2,000 every year until age 60.

Tom: Tom is also a university student, but understands the importance of money and starts saving $2,000 every year until he turns 36, when he starts a family and needs the money.

The following screenshot summarizes Rob and Tom's saving habits:

Looking at the table, you can see that Rob invested $40,000 more than Tom did. Even though it's $40,000 over 20 years, that's a lot of money that can be spent on other things such as an annual vacation!

Now let's take a look at the earnings. To isolate and simplify the demonstration of the time value of money, the following screenshot is based on the assumption of a 10% return without taxes.

At the age of 60, Rob has accumulated $658,079 while Tom has $856,910, almost $200,000 more! This is with $40,000 less in investments too! This illustrates that saving early is very important and is something you can't buy back by saving more in the future to try and "catch up."

I am not advocating that you should just save for 10 years and stop, but rather to start saving as soon as you can!

So, when's the best time to start saving? YESTERDAY! Since we can't travel back in time, the next best time is as soon as you finish reading this. GO!