Here’s a question for you. How much more would a woman who saved $6,000 at age 22 have at age 70 compared to a woman who saved $6,000 at age 34, assuming both put the money in an investment growing at 6%? Neither woman made any additional deposits or took any withdrawals for 48 and 36 years, respectively. They just set it and forgot it.
The answer? Twice as much, or approximately $98,000 versus $49,000. This is the magic of compounding … a.k.a. starting your saving and investing early. If those dollars were put in a Roth IRA—well, you can even withdraw the balance tax-free.
Graduation season is here as the local grocery store bakery displays make very clear. News headlines are filled with the undoubtedly inspiring advice given to newly-minted degree holders by wise and famous commencement speakers. I hope all of them tag one line on at the end—start saving money now. Or even better, yesterday. In Wisconsin, you can start working at age 14. You can bet each of my kids will have a Roth IRA shortly thereafter.
Yes, maybe I didn’t catch you before college and now you’re burdened by student debt. Yes, it can be challenging to put money away, what with the rising costs of healthcare, rent, childcare … life. At the same time, though, it’s hard to ignore the reality of math. If you start with $10 and invest it at 6%, in one year, you will have $10.60. That doesn’t sound like a lot, does it? But now you don’t just have $10 growing at 6%, you have a little bit more. And the next year, you’ll have a little bit more … and so on and so forth.
After about 12 years, you’ll have doubled that $10 to $20. You would’ve known that right off the bat if you were familiar with the Rule of 72. The Rule of 72 is an easy way of calculating how long it will take for your money to double. Take 72, divide it by the rate of return, and the result is approximately how long it will take for your investment to double. From our example above, 72 divided by 6 is 12. It will take approximately 12 years for that initial investment of $6,000 to grow to $12,000 and then another 12 years to get to $24,000.
Think for a second about the value of that final doubling. By definition, the last dozen years will ALWAYS contribute the same dollar value as ALL the years before it, assuming, of course, a consistent 6% rate of return. If you can get a consistent 8% return—the long-term return of the US stock market stands at about 10%—the doubling will occur every nine years instead of 12. Imagine what the numbers would be if you were actually adding to your savings each year beyond that initial deposit.
Math—it’s a beautiful thing.
When I graduated from business school, I had a Net Worth that was less than $0 … a lot less. I still had student loans from my undergraduate studies and I had just spent two years making $0 and spending $40,000. I moved to New York City without a job. The calculus was not pretty. I sublet an inexpensive room in a shared apartment and eventually took a position with a company that offered a 401(k) plan with a standard employer match. Even though at the time, what I owed was much greater than what I owned, there was never any question of not saving money for retirement, for a rainy day, for freedom, for something admittedly vague and far off in the future.
Why? Because I did the math. So should you.
I wished I had started saving later, said exactly no one ever.