Hello friends! Does making money with little effort sound like something you’re interested in? If so, then a high early savings rate and maximizing compound interest is for you!
Starting early in terms of saving for retirement means you harness the power of time. There are many examples online of how saving early in life allows compound interest to work in your favor (just google “early saving and compound interest”). By having a high savings rate early on in your career, aka right now, you contribute to either a retirement account such as a Roth IRA or 401K (~5-7% interest rate from investment return with luck!) or even a high yield savings account (2-3% interest rate). You then sit back, relax, and allow your investment to grow over time!
Note: Compound interest = interest on your interest that is added back to the principal/beginning amount.
Examples always help me put things into perspective, so here’s an example of two people saving at different time periods in their life. In this example, they both are contributing to a retirement account where they get a 7% annual investment return.
1. Jenny saves $5,000 a year beginning at age 18 and stops saving at age 28. Her total investment is $50,000. From the 7% investment return during that ten-year period, she gained an extra $23,918. She feels accomplished and lets her $73,918 sit for the next 30 years, doesn’t save a penny more, and retires at age 58.
2. Lewis was late to the game and started saving at age 28 (right when Jenny stopped saving). He saves $5,000 a year until he retires at age 58. He saved a total of $150,000 over those 30 years. Sounds great right?
Who wins the compound interest game at age 58? Lewis saved over 30 years, Alice started early but only saved over 10 years. Final totals: Jenny – $562,682.67 , Lewis $505,365.21. Jenny wins despite only saving for 10 years because she started early.
That my friends is the power of compound interest! Making up for lost time is harder later in life because you have to save more and do not have as much time for compound interest to work. The more you delay savings, the more you will have to save in the future to make up for it. And as we are already starting later to the game as medical residents, it is even more important to start saving with our first paycheck!
I hope this post helped convince you that today is the day to start saving, so that you too can benefit from the power of compound interest! What do you guys think? Does having a high savings rate starting right now sound reasonable? What are your thoughts? Comment below!
https://www.cnbc.com/2017/09/27/nerdwallet-charts-show-the-power-of-compound-interest.html
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