Let’s assume for a moment that you are young and attractive. Why attractive? I don’t know. It’s my blog, I’ll set the rules. Anyway, assume for a moment that you are young and attractive. In terms of retirement, what’s the best thing you’ve got going for you? Besides your attractiveness. That’s right, time. Time is your friend. But time is easily wasted. I’m not suggesting that you have “plenty of time to save for retirement.” I’m suggesting that you use time to grow your money. Today, we learn. Thank God I dropped my securities licenses.
What people fail to understand is that when you don’t save for the future, then time can’t be used as a tool. When your money grows, it (ideally) grows every year. For instance, if you invest $5,000 that earns 8%, then after one year you will have $5,400. Great. But if you make this initial investment 20 years from your retirement goal versus 5 years from your retirement goal, then time makes all the difference. Take a look at the spreadsheet below. Let’s say that you are 30 years old, and you decide to invest $5,000 per year for just 5 years and let the money marinate, yep I said marinate, for 20 years from the day of the initial investment. And let’s assume that you earn an 8% rate of return on your money. This is a very reasonable rate of return over a 20 year period. Obviously, you would need to be in some sort of stock market investment (stocks, ETFs, or mutual funds) to receive that sort of return. At the end of 20 years, you would have $100,493.19. Not too shabby.
Now, let’s assume that you wait to start investing until you are 45 years old. Even if you saved 3 times the amount of money ($15,000) for five years, you still wouldn’t be able to equal the account that started growing at age 30. Money wasn’t the issue here. Time was the issue.
People tend to think that they will have more money to save, the older they get. This may or may not be true. Even if it is true, those people will need to save three times the amount if they want to achieve the exact same financial goals. Would you like to invest $25,000 to reach $100,000? Or would you rather invest $75,000?
What other things should you consider when you start to get your head around this concept?
- The closer you are towards your time goal (having $100k by age 50), the more risk you have to take, or the more money you have to invest.
- The further you are away from from your time goal (having $100k by age 50), the less risk you have to take and the less money you have to invest.
- You could invest less than $5,000 initially at age 30 and still hit your $100,000 goal if you continued investing after the 5th year.
- You could invest $100,000 on your 50th birthday, and hit your goal too
The next time you hear or think “there’s plenty of time to invest”, you need to check yourself. There’s plenty of time for your money to grow, but the longer you wait to invest, the harder it will be.
So how do you free up $5,000 to invest? It’s pretty simple. And by pretty simple, I mean that I have been writing about that for 7 years on this blog. Also, you could set aside just $14/day (Sally Strothers style), and after 365 days, you’d have $5,110. Invest the $5,000, and use the $110 for falconry lessons.
BTW, can you believe financial regulatory compliance officers wouldn’t allow me to write content like this? Sad, but true. Their take is that I’m “guaranteeing you 8% by writing this post.” Three cheers for dropping my licenses!!!
Peter Dunn a.k.a. Pete the Planner® is an award-winning financial mind and a former comedian. He’s a USA TODAY columnist, author of ten books, and is the host of the popular radio show and podcast, The Pete the Planner Show. Pete is considered one of the foremost experts on financial wellness in the world, but he’s just as likely to talk your ear off about bass fishing.