Many a time, I have heard people saying that when it comes to savings or investing, it is always good to start early.
Does it really make sense?
How big is the effect of saving or investing early?
If I have 20 years to save or invest
Say if I have 20 years ahead of me to save or invest. If I were to save one thousand dollars per year for the first ten years, and then just let the savings grow for the next ten years. How much will I accumulate if I can get an interest of 3% on my savings?
| Year | Yearly savings | Total savings at end of the year | Interest Earned that year | Total |
| 1 | $1,000 | $1,000 | $30 | $1,030 |
| 2 | $1,000 | $2,030 | $61 | $2,091 |
| 3 | $1,000 | $3,091 | $93 | $3,184 |
| 4 | $1,000 | $4,184 | $126 | $4,309 |
| 5 | $1,000 | $5,309 | $159 | $5,468 |
| 6 | $1,000 | $6,468 | $194 | $6,662 |
| 7 | $1,000 | $7,662 | $230 | $7,892 |
| 8 | $1,000 | $8,892 | $267 | $9,159 |
| 9 | $1,000 | $10,159 | $305 | $10,464 |
| 10 | $1,000 | $11,464 | $344 | $11,808 |
| 11 | $0 | $11,808 | $354 | $12,162 |
| 12 | $0 | $12,162 | $365 | $12,527 |
| 13 | $0 | $12,527 | $376 | $12,903 |
| 14 | $0 | $12,903 | $387 | $13,290 |
| 15 | $0 | $13,290 | $399 | $13,688 |
| 16 | $0 | $13,688 | $411 | $14,099 |
| 17 | $0 | $14,099 | $423 | $14,522 |
| 18 | $0 | $14,522 | $436 | $14,958 |
| 19 | $0 | $14,958 | $449 | $15,406 |
| 20 | $0 | $15,406 | $462 | $15,869 |
At the end of 20 years, I would have saved at total of $15,869 in my account.
Assuming now I were to start saving on the 11th year onwards instead till the 20th year. How much do I have to save per year in order to have the same amount of savings of $15,869? Assuming the same 3% interest on my savings.
| Year | Yearly savings | Total savings at end of the year | Interest Earn that year | Total |
| 1 | $0 | $0 | $0 | $0 |
| 2 | $0 | $0 | $0 | $0 |
| 3 | $0 | $0 | $0 | $0 |
| 4 | $0 | $0 | $0 | $0 |
| 5 | $0 | $0 | $0 | $0 |
| 6 | $0 | $0 | $0 | $0 |
| 7 | $0 | $0 | $0 | $0 |
| 8 | $0 | $0 | $0 | $0 |
| 9 | $0 | $0 | $0 | $0 |
| 10 | $0 | $0 | $0 | $0 |
| 11 | $1,344 | $1,344 | $40 | $1,384 |
| 12 | $1,344 | $2,728 | $82 | $2,810 |
| 13 | $1,344 | $4,154 | $125 | $4,279 |
| 14 | $1,344 | $5,623 | $169 | $5,791 |
| 15 | $1,344 | $7,135 | $214 | $7,350 |
| 16 | $1,344 | $8,694 | $261 | $8,954 |
| 17 | $1,344 | $10,298 | $309 | $10,607 |
| 18 | $1,344 | $11,951 | $359 | $12,310 |
| 19 | $1,344 | $13,654 | $410 | $14,063 |
| 20 | $1,344 | $15,407 | $462 | $15,870 |
In order to achieve the same savings, I will have to save $344 dollars more per year. This is 34.4% more effort compared to if I were to start 10 years earlier. I will have to put in one-third more of effort in order to get the same results.
Therefore the saying is right:
Start early when it comes to investing or savings.
If I have a dream to save $1M dollars
Let’s say I had a dream to accumulate a million dollars in twenty years, how much then do I have to save per year to reach that?
Future value : $1,000,000
Interest rate : 3%
Number of years : 20
Amount to save : $37,215.71 per year
From above, if I can save or invest $37,217.15 per year at 3% of returns I will definitely be able to reach the million dollar dream.
What if I can only save half that amount? What can I do to still reach that dream?
Future value : $1,000,000
Nubmer of years : 20
Amount to save : $18,607.85 per year
Interest rate : 9.44%
Yes, I can still reach the million dollar dream, however I will have to find a investment that can give me 9.44% of returns.
In the upcoming articles, I will explore how you can have leveraged returns from your investment.
If you are looking for a financial book to read and improve your financial awareness, I would highly recommend “The Richest Man in Babylon” by George Samuel Clason. I have shared the 3 important financial lessons I learned from the book in this article.
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