Save Early: The Power of Compound Interest

When I was conducting financial education seminars for employers offering 403b plans to their employees, one slide always caught the attention of people. In one column on the side was the balance of an account for someone who stated saving for 10 years at age 21 to 30, then stopped saving but left the money to continue to compound until age 55 or another 25 years. In the other column was someone who started saving at age 31 to age 55. So, 25 years of saving versus 10, but only 25 years of compounding versus 35. The assumption for the savings rate and rate of return were the same.   

People were shocked that the 10 years of saving but longer compounding had the higher account value. I even had someone with a background in mathematics tell me that could not be. You can do this easily with a compound interest calculator on the web. I used the one on Nerdwallet. 

My inputs

Initial deposit $1

Contribution amount $200

Contribution frequency Monthly

Years of growth 10

Estimated rate of return 6%

Compound Frequency Annually

Results = $32,496.48

Then make the following changes.

Initial deposit $32,496

Contribution amount $0

Contribution frequency Monthly

Years of growth 25

Estimated rate of return 6%

Compound Frequency Annually

Results = 139,468.63

The above results are approximately what you would have with 10 years of saving but leaving the money in the account to compound another 25 years.

Now let’s look at saving for 25 years and change the inputs to,

Initial deposit $1

Contribution amount $200

Contribution frequency Monthly

Years of growth 25

Estimated rate of return 6%

Compound Frequency Annually

Results = $135,262.08

The results show that you have more money from 10 years of saving and 35 years of compounding than from 25 years of saving and compounding. 

This is a great exercise to share with your kids or grandkids to motivate them to save, especially when they get their first job. I advise teaching them this before teaching them about investing. You can use this same calculator again to teach them about the effect of rates of return. Change the compounding rate to the historical average return of the 10-year Treasury versus the historical average of the S&P 500. The difference over a long period will be tens of thousands of dollars more.

If you are like most people and did not start saving early, that is okay. The point is not that you should have started sooner but to get started. If saving is challenging, start small and commit to increasing your savings rate annually. Many employer-sponsored retirement plans automatically increase contributions until you reach a certain percentage of your salary in contributions. Saving is like starting a new habit; sometimes, the hardest part is getting started. I recommend making it automatic by having the funds come directly from your paycheck or checking account. 

After you have saved enough for emergencies, you can consider investing some of the money and moving to add to your investments each month. I helped many people get started, and they all told me months later that they feel so much better about their finances. 

For a free consultation on help with getting started saving and investing, schedule a 30-minute appointment

Investment advice offered through Stratos Wealth Advisors, LLC,

a registered investment advisor. Stratos Wealth Advisors, LLC and

Synergy Wealth Management are separate entities.