1: Let’s say we have a friend, Rose. Upon graduating from college and getting her first job, Rose starts socking away $250 a month into her 401K. She’s not making a big salary, but she finds a way to do it. She is consistent.
Rose puts away $250 each month for the next 17 years. Earning 8 percent on her money, she accumulates about $120,000, Darren Hardy documents in his terrific book, The Compound Effect.
Not bad. But, certainly not enough to retire on.
Or, is it?
Assume for a moment when she turns 40, Rose stops putting any additional money aside. Over the next 27 years, she contributes to her retirement…. exactly zero.
But her $120,000 continues to earn an 8% return. At age 67, she now has $1,033,290. Rose sells her house and heads to Florida to enjoy the sunshine…
2: We also graduate from college and get our first job. But we decide not to put anything in our 401K. We’re young. Retirement is a long way off. Other things are more important right now. We’ve got plenty of time to save up for retirement.
When we turn 40, we decide it’s time to saving for retirement. We begin deducting $250 a month.
For the next 27 years, we put aside $250. At age 67, we too want to retire. But despite the fact that we’ve been saving longer (27 years vs. Rose’s 17 years) and saved $27,000 more, we’ve accumulated only $285,000.
That’s the power of compound interest.
Back to work we go…
3: The message of Darren’s book is not to blame the 23-year old version of ourselves for not saving more.
The message is: start now.
As Benjamin Franklin once said: “Money makes money. And the money that money makes, makes money.”
When was the best time to plant a tree?
Twenty years ago.
The next best day?
Today.
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Reflection: Would I like to save more for my retirement? How important is this to me?
Action: Start or increase your contribution today.
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