Here’s What Will Happen if You Start Saving at 25 [CHART]
“The most powerful force in the universe is compound interest.” -Albert Einstein
It’s never a bad thing to be able to put money aside for savings. It’s even better when that savings money starts to make money — on its own. That’s the concept behind compound interest — your savings money earns interest, then that interest starts to earn interest. Are you interested yet?
JP Morgan Asset Management included this chart in their 2014 “Guide to Retirement.” In short, it shows that a 25-year-old putting away the same amount of money every year still accrues way more money than older folks who put the same amount of money away for longer, but later in life.
So we have three people: Susan, Bill and Chris.
Susan invests $5000 per year for 10 years ($50,000) between the ages of 25 and 35.
Bill invests $5000 per year for 30 years ($150,000) between the ages of 35 and 65.
Chris invests $5000 per year for 40 years ($200,000) between the ages of 25 to 64.
It makes sense that Chris comes out with the most money in the end — he invested the most for the longest. However, Susan only invested a quarter of the amount Chris did for a quarter of the time, and still ended up with more than 50 percent of what Chris ended up with.
Our friend Bill, it seems, chose to invest at the wrong time and ended up with the least amount of money for retirement. Don’t be a Bill.
Why did Susan come out as the most efficient investor? Compound interest, or the fact that her early investment and interest earned in 10 years began to snowball afterwards. Of course, Chris ended up with the most money at the end, but most of us can probably only save money like Susan does.
The lesson is to start saving as early as possible, as much as possible, because it definitely pays off. Pretty much all types of savings accounts gain interest, some more than others — be sure to compare interest rates and how often your investments are compounded (i.e. quarterly, annually). When your savings money starts to earn, and that earned money starts to earn money, you’ve got a comfy avalanche of cash coming your way later on in life.