If we are saving for retirement, starting at 25 or at 35 makes a remarkable difference. Although what follows is nothing new, I think it doesn’t hurt to recall it before we continue with a series of more advanced articles on financial education. Andy Kiersz, an editor at Business Insider, has put together a chart with two hypothetical savers: Emily (in blue) and Dave (in red) each start saving €200 a month (the original example is in dollars) with an estimated return of 6%.
See also: The worst money mistakes people make in each decade of their lives
The difference is that Emily starts saving that €200 at 25, while Dave starts at 35, just 10 years after Emily. Both savers keep adding €200 every month until the day they retire at 65.
By the age of 65, Emily has contributed €96,000 of her savings, while Dave has contributed €72,000.
Emily, who started saving only 10 years before Dave, has put in 33% more money, but when it’s time to retire she has almost twice as much money as Dave. As the chart shows, Emily would have €402,492, while Dave would have €203,118.
In other words, with the same annual return, that 33% “extra” money we put in ends up becoming “100% more” money, thanks to those 10 years in which compound interest has been doing its job. To talk about the magic of compound interest, we need time. That’s why the sooner you start saving, even a small monthly amount, the more generously time rewards your money by multiplying it.
Further reading
- How much money should we save each month to be financially responsible?
- Extra income: should we pay off debt or save and invest?
- 5 reasons to have an emergency fund
Featured image: self scanned, Public domain, via Wikimedia Commons.
